Rating Downgrade Details

• Operating Income fell sharply to ₹0.22 Cr in FY25 from ₹148.63 Cr in FY24.
• Profit After Tax (PAT) reduced to ₹1.60 Cr in FY25 from ₹3.23 Cr in FY24.

Outlook stable despite near-zero revenue from ship breaking; significant real estate exposure remains a key risk.

Acuite's Action Explained

Acuite Ratings & Research downgraded Hariyana Ship Breakers Limited's (HSBL) long-term bank facilities rating. The rating for Rs. 25 crore facilities was cut to 'ACUITE BB' from 'ACUITE BB+'.

The agency reaffirmed the short-term facilities rating at 'ACUITE A4+' for Rs. 200 crore.

The downgrade cited weak operating performance in FY25 and FY26 due to a shortage of ships available for dismantling. This has led to negligible revenues and operating losses.

What the Downgrade Means

The downgrade signals increased perceived risk for lenders regarding the company's long-term debt obligations. This could potentially lead to higher borrowing costs or stricter credit terms for HSBL.

While the short-term rating remains reaffirmed, indicating stability for immediate obligations, the long-term view reflects structural challenges impacting the company's core business.

Industry Challenges and Company Context

Hariyana Ship Breakers operates in the challenging ship recycling industry, where vessel availability is crucial. The current scarcity has severely impacted its operational scale.

This is not the first time operational challenges have surfaced. In September 2023, Acuite had already revised the company's outlook to 'Negative' due to deteriorating performance, declining revenues, and lower price realizations.

Adding to the challenge, around 94% of HSBL's net worth is tied up in real estate associate companies. This limits the company's financial flexibility from its core ship-breaking business.

Future Borrowing Landscape

Lenders will likely scrutinize HSBL's ability to generate sufficient cash flow from its limited operations or investment portfolio to service its long-term debt.

Future long-term debt may come with stricter terms or higher interest rates.

Key Risks for Hariyana Ship Breakers

• Operations are expected to remain weak through FY26 because of the continuing shortage of available ships.
• Ship breaking operations are vulnerable to vessel availability and fluctuating steel prices. Geopolitical factors and bidding competition can also reduce profit margins.
• Around 94% of net worth is invested in associate/affiliate real estate entities, limiting financial flexibility.
• Additional large investments in group companies could lead to another rating downgrade.

Who Else is in the Space?

Few direct listed peers operate solely in the Indian ship-breaking sector. Inducto Steel Ltd and VMS Industries Ltd are also involved in ship-breaking and trading activities.

Major Indian shipbuilders such as Mazagon Dock Shipbuilders and Cochin Shipyard focus on defence and commercial vessel construction, which is a distinct segment.

Key Financials at a Glance

• HSBL's gearing was low at 0.11x in FY2025, indicating limited reliance on borrowed funds.
• Coverage ratios were adequate, with interest coverage at 2.25x and DSCR at 1.88x in FY2025.
• The company reported contingent liabilities of Rs. 182 crore.

What to Watch Going Forward

• Monitor ship availability for dismantling, crucial for reviving operations and revenue.
• Watch how the company manages its finances during this period of low operations and if improvements emerge by FY2027.
• Track the performance and cash flow of the real estate associates, given their large impact on net worth.