By Abhishek Rathi

India Ratings and Research (Ind-Ra) has assigned Srikalahasthi Pipes Limited’s (SPL) additional bank facilities a long-term rating of ‘IND AA-’. The Outlook is Stable. The detailed rating actions are given below: 

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Long-Term Issuer Rating

 

 

 

 

IND AA-/Stable

Affirmed

Term loan

-

-

FY29

INR3.83

IND AA-/Stable

Assigned

Fund-based working capital

-

-

-

INR2.9

IND AA-/Stable

Assigned

Non-fund based working capital

-

-

-

INR3.8

IND A1+

Assigned

Commercial paper (to be carved out of working capital limits)

-

-

7-365 days

INR1.0

IND A1+

Assigned

Proposed fund-based working capital*

-

-

-

INR0.3

Provisional IND AA-/ Stable

Assigned

Proposed non-fund-based working capital*

-

-

-

INR0.3

Provisional IND A1+

Assigned

Proposed non-convertible debentures (NCDs)

-

-

-

INR2.0

WD

Withdrawn (company did not proceed with the issuance as envisaged)

*The ratings are provisional and shall be confirmed upon the sanction and execution of the loan documents for the above facilities by SPL to the satisfaction of Ind-Ra. 

Analytical Approach: Ind-Ra has continued to factor into the ratings the support that SPL can extend to the Electrosteel Group, comprising Electrosteel Casting Limited (ECL) and SPL, in view of the operational linkages between the companies. 

KEY RATING DRIVERS

Robust Business Profile with Healthy Market Share: SPL has a robust and diversified business profile with a dominant presence (about 23% market share along with ECL, as on 31 March 2019) in the manufacturing of ductile iron (DI) pipes, along with integrated operations, and presence in the value-added product segments. SPL operated at near full capacity in FY19 and 9MFY20, supported by strong demand growth over the years.

Ind-Ra expects demand to sustain over the next 12-18 months, given the absence of fresh capacity additions in the industry and support by government schemes, namely Nal se Jal, Atal Mission for Rejuvenation and Urban Transformation, Water for All, Swachh Baharat Abhiyan, and the Smart Cities Mission.

Integrated Operations: SPL’s facility is backward integrated with a captive blast furnace and coke oven used for converting the raw material into DI pipes. It also has a waste-heat recovery system based power plant that uses gas from the coke oven, which meets around 60% of its power requirement. The balance power requirement is purchased from the state grid. SPL also has a cement plant which uses blast furnace slag to manufacture portland cement, which is 45%-50% captively consumed in the manufacturing of DI pipes.

SPL commissioned a 9MVA furnace for producing ferro silicon in January 2020 and the management expects its other 9MVA furnace for producing silico manganese to be commissioned in 4QFY20. The final product from both furnaces will be captively consumed and sold in the market in a 1:1 ratio.

Strong Credit Metrics: SPL's interest coverage (EBITDA/interest expense) improved to 5.7x in 9MFY20 (FY19 : 4.8x) and net leverage (net debt/EBITDA) increased to 0.9x (0.8x), due to an EBITDA margin expansion and an increase in debt taken to INR6 billion (INR4.45 billion) to fund the ongoing capex for capacity expansion. Ind-Ra expects the interest coverage to moderate to 4.5x-5x over FY20-FY21, owing to a rise in interest cost due to an increase in debt for the ongoing capex, and to improve from FY22 on the commencement of operations from an additional DI pipes capacity. Ind-Ra expects the net leverage to remain around 1x in FY20 and peak to 1.5x-1.75x in FY21, and fall below 1x in FY22.

Improving EBITDA Margin, Exposed to Volatility: SPL’s 9MFY20 margin expanded to 15.3% (9MFY19: 11.9%), supported by higher realisations and lower raw material costs. Ind-Ra expects the margin to be maintained in FY20, owing to moderation in raw material cost and reduction in realisations during 4QFY20. The company’s margin has historically been volatile (FY19: 12.4%; FY18: 15.3%; FY17: 19.8%) as it is exposed to fluctuations in raw material prices. SPL has mostly fixed-priced contracts with no escalation for movement in raw material prices, which impacts its margin.

Support and Synergies: SPL is a part of Electrosteel Group, which has an operating record of around six decades. The group has adequate liquidity with close monitoring of cash flows. Ind-Ra expects SPL to maintain adequate liquidity as the group has assured to extend any support to the associate company, as and when required. The group has demonstrated support to other group companies in the past, which has been factored by Ind-Ra in arriving at the rating of SPL.

Low Forex Risk: During FY19, SPL booked a forex income of INR0.06 billion (FY18: INR0.02 billion), on account of rupee depreciation as the company keeps its forex exposure hedged along -with forex debt due within next 12 months. Foreign currency debt outstanding, as on 31 March 2019, was INR0.25 billion.

As on 30 September 2019, the company had hedged 95% of its forex exposure and the balance was kept open. Further, for long-term liabilities such as external commercial borrowings, the company hedges exposure which is due for payment within a year. The company further hedges its payables through forward/option contracts.

Moderate Revenue, Medium Scale of Operations: SPL’s revenue grew 10% yoy in 9MFY20 to INR12.6 billion (FY19: INR15.58 billion) due to an INR2,000 per tonne increase in realisation. Ind-Ra expects the revenue to sustain over FY20-FY21, as the company is operating at near full utilisation.

The company’s absolute EBITDA increased in 9MFY19 at INR1.9 billion due to reduction in raw material prices and increased realisation. Ind-Ra expects SPL’s EBITDA to improve from FY22, post the commencement of increased capacity of DI pipes and full operation of its ferro alloy plants. SPL’s blended EBITDA per tonne improved to INR7,300 in 9MFY20 (FY19: INR5,259) due to higher operational profit..

Liquidity Score- Adequate: SPL’s free cash balance stood at INR4.6 billion on 30 September 2019 (FY19: INR4.57 billion), in the form of fixed deposits and current account balance. The average utilisation of the fund-based facilities was comfortable at 48.5% for the 12 months ended December 2019. In FY20, SPL has a term-debt obligation of INR0.35 billion and the agency expects the same to be met out of cash accruals in the year. Cash flow from operations and fund flow from operations have been positive over FY17-FY19 while the agency expects free cash flows to turn negative in FY20-FY21 owing to the planned capex.

Debt-Led Capex: SPL has planned to increase the capacity of DI pipes manufacturing to 0.5 million metric tonne per annum (mmtpa) with the new blast furnace, as well as that of the coke-oven plant to 0.27mmtpa. It also intends to increase captive power generation to 17MW from 14.5MW. The majority of the capex would be commissioned by end-FY22 with total cost of around INR5 billion, to be funded by a mix of debt (40%) and internal accruals (60%).

Stretched Working Capital Cycle: SPL’s business is working capital intensive in nature with the operating cycle ranging from 102 days to 120 days over FY16-FY18, which increased to 135 days in FY19, owing to a rise in inventory levels at year-end. In case of raw materials, the company stocks its coking coal requirement due to a long importing lead time (70-90 days). Also, the average collection period is long at 60-80 days. During 6MFY20, receivables and inventory stretched to 87 and 100 days, respectively, due to delays in the execution of contracts and payment from engineering, procurement and construction players in some states. Ind-Ra expects the working capital cycle to remain elongated at 140-150 days in FY20, owing to a continuous stretch in receivables and inventory days.


RATING SENSITIVITIES

Negative: Any sustained declined in EBITDA margin and/or any further debt-laden capex leading to net leverage exceeding 2.5x  and/ or removal of anti-dumping duty with an adverse impact on the company would result in negative rating action.


COMPANY PROFILE

SPL manufactures DI pipes at 0.3mmtpa in Rachagunneri, Andhra Pradesh. It was formerly known as Lanco Industries Limited (LIL), and was established in 1991 by Lanco group of companies to manufacture pig iron using Korf (German) Technology. The company has a fully backward-integrated manufacturing facility which includes a sinter plant, coke oven plant, power plant and a sewage treatment facility in the same complex spread over 300 acres.

 

FINANCIAL SUMMARY

Particulars

9MFY20

FY19

FY18

Revenue (INR billion)

12.6

15.6

15.9

Operating EBITDA (INR billion)

1.9

1.9

2.4

EBITDA margin (%)

15.3

12.4

15.3

Net leverage (x)

0.9

0.8

0.1

Interest coverage (x)

5.7

4.8

5.7

Source: SPL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

8 November 2019

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Stable

Term loan

Long-term

INR3.83

IND AA-/Stable

-

Commercial papers

Short-term

INR1.0

IND A1+

-

Fund-based working capital limits

Long-term

INR3.2

IND AA-/Stable

-

Non-fund-based working capital limits

Short-term

INR4.1

IND A1+

-

Proposed NCDs

Long-Term

INR2.0

WD

Provisional IND AA-/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Abhishek Rathi

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40356110

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121