Raghunath Alloys: A Rs 12 Crore Expansion on Rs 1.10 Crore of Profit
Raghunath Alloys Ltd operates a steel re-rolling mill in Raipur. FY2024 revenue fell to Rs 96 crore from Rs 110 crore in FY2023, with an EBITDA margin of 8.0%. Interest cost was Rs 5.20 crore and depreciation Rs 1.05 crore, giving PBT of Rs 1.45 crore and PAT of Rs 1.10 crore. Total debt is Rs 42 crore against a net worth of Rs 18 crore; existing term loans carry annual principal repayment of Rs 3.00 crore. The current ratio is 1.08 and cash flow from operations was Rs 2.40 crore against maintenance capex of Rs 2.00 crore. Debtor days stretched to 105 from 78, while creditor days are only 40. The company has advanced Rs 3.50 crore interest-free to a promoter-group trading firm with no repayment schedule, and 60% of promoter shareholding is pledged with an NBFC. It has applied for a Rs 12 crore eight-year term loan at 10.5% for a galvanising line, plus a Rs 2 crore ad-hoc working capital overrun, and asks for a two-year moratorium.
1. Compute the interest coverage and debt service coverage ratio with and without the new loan, and state whether the Rs 12 crore proposal is serviceable from existing operations.
Read the worked answer
Base numbers. EBITDA = 8.0% x Rs 96 crore = Rs 7.70 crore. (Cross-check: 7.70 - 1.05 - 5.20 = Rs 1.45 crore PBT, which matches the stated PAT after tax.)
Interest coverage
- Present: 7.70 / 5.20 = 1.48x
- Post-sanction: new interest = 12 x 10.5% = Rs 1.26 crore, so 7.70 / 6.46 = 1.19x A 1.19x cover means a 16% fall in EBITDA wipes out the ability to pay interest at all.
Debt service coverage Annual instalment on Rs 12 crore over 8 years at 10.5% = 12 x 0.1909 = Rs 2.29 crore (interest Rs 1.26 crore + principal Rs 1.03 crore in year 1).
| Obligation | With new loan | Without new loan |
|---|---|---|
| Interest | 6.46 | 5.20 |
| Principal | 4.03 | 3.00 |
| Total debt service | 10.49 | 8.20 |
| EBITDA | 7.70 | 7.70 |
| DSCR | 0.73 | 0.94 |
Verdict. Even before the new loan the company cannot meet its obligations from EBITDA - DSCR is 0.94. The gap is being bridged by borrowing: CFO of Rs 2.40 crore less maintenance capex of Rs 2.00 crore leaves Rs 0.40 crore against Rs 3.00 crore of principal due. Adding the galvanising line takes DSCR to 0.73, and the two-year moratorium only hides this, since interest still accrues and the balloon after the moratorium is larger. The project's projected 22% IRR is irrelevant to a lender if the existing business is consuming cash. On standalone numbers the proposal is not serviceable.
2. List the red flags in the financial statements and explain what each one signals about management quality rather than mere ratio stress.
Read the worked answer
- Turnover down Rs 14 crore with debtor days up 27 days. 27 x (96/365) = about Rs 7.1 crore of additional working capital locked in receivables. This, not the new project, explains the Rs 2 crore overrun request. Sales may be being bought with credit to hold market share.
- Creditor days of 40 against debtor days of 105. Suppliers are paid fast while customers pay slow - a 65-day funding gap the banks are being asked to carry. It also suggests the company has lost bargaining power with both ends.
- Rs 3.50 crore interest-free advance to a promoter-group firm with no repayment schedule. This is lender-funded capital sitting outside the borrowing entity. It is the single strongest negative signal: capital allocation follows promoter convenience, not the business.
- 60% of promoter shareholding pledged with an NBFC. Indicates promoter-level liquidity stress. If the NBFC invokes the pledge, control of the borrower can change without the bank's consent.
- D/E of 2.33 rising to roughly 3.0 post-sanction. The entire fund-based growth is being financed by debt, with no fresh equity proposed.
- CFO of Rs 2.40 crore against Rs 3.00 crore of principal due. Repayment is already being funded by refinance; the account is structurally dependent on limit enhancement.
- Current ratio 1.08. Thin for a commodity processor where inventory values move with steel prices.
Taken together, these are not cyclical symptoms alone. They describe a borrower using short-term bank funds to finance long-term assets and related-party transfers - a classic route to an SMA classification within three or four quarters.
3. What would you counter-propose instead of an outright rejection, and what covenant package should accompany it?
Read the worked answer
Counter-proposal. Reject the Rs 12 crore and the Rs 2 crore overrun as structured, but keep the relationship by converting the request into a conditional, self-funding package.
- Make the promoter fund the project first. Require Rs 4 crore of fresh equity (not a loan from a group company) before any sanctioned amount is released. This takes D/E from a projected 3.0 to about 2.3 and proves commitment.
- Unwind the Rs 3.50 crore related-party advance. Direct the proceeds to the CC account. This alone funds a large part of the Rs 2 crore overrun and removes the most damaging red flag.
- Cap the term loan at Rs 8 crore, tenor 10 years, 6-month moratorium, no balloon. DSCR at 8 crore with existing obligations is roughly 7.70 / (5.20 + 0.84 + 3.00 + 0.66) = 7.70 / 9.70 = 0.79 - still short, which is why points 1 and 2 are conditions, not options. Once Rs 3.50 crore is applied to reduce debt, existing interest falls to about Rs 4.60 crore and DSCR moves to roughly 0.95, closing to above 1.0 with the equity infusion.
- Take the overrun off the table. It should be met from receivables release, not from a new facility.
Covenant package:
- DSCR not below 1.25x tested annually; interest coverage not below 1.75x.
- Debtor days capped at 85, with monthly ageing reports and an escrow of the top three customers' receivables.
- Total promoter pledge to be brought below 30% within 12 months; any invocation to be a default event.
- No further loans, advances or guarantees to group entities; the existing advance to be recovered as a condition precedent.
- First charge on the new galvanising line, DSRA of one quarter's instalment, personal guarantee of promoter-directors, and a covenant that no dividend is declared while DSCR is below 1.25.
- Independent TEV study and a stock-and-receivables audit before disbursement.