India Ratings & Research (Ind-Ra) has downgraded Uttam Galva Steel (UGSL) long-term issuer rating to 'A-' from 'A'. The outlook is stable.

The downgrade reflects the significant deterioration of UGSL's financial leverage to 6.7x in FY14 from 5.1x in FY13 and net interest coverage to 1.2x from 1.3x. This was mainly due to reduced EBITDA, higher-than-estimated debt-led capex and a slowdown in domestic demand, Ind-Ra said. In FY14, UGSL's net debt increased to Rs 35.2 billion on the capex of Rs 9.9 billion incurred for new colour coating line, service centre, revamping of galvanising line, etc. In FY14, operating EBITDA was Rs 5.3 billion. Since the company has to regularly incur capex to upgrade its product portfolio, Ind-Ra expects net leverage to remain moderately high over the next one-to-two years.

The company's profitability from manufacturing operations declined in both FY13 and FY14. Blended EBITDA per ton fell to Rs 5,055 in FY14. This is partly due to the lack of backward integration, increasing competition from domestic players as well as the slowing demand. EBITDA margins of 10% in FY14 and 10.2% in FY13 were mainly supported by higher trading profits.

UGSL's liquidity is comfortable with 55% average working capital utilisation during the 12 months ended May 2014 and cash and equivalent of Rs 1.3 billion as at FYE14. Also, the company's repayment obligations are low over the next two years and are likely to be met comfortably.

Shares of the company declined Rs 2.15, or 2.73%, to settle at Rs 76.60. The total volume of shares traded was 99,261 at the BSE (Monday).