By Abhishek Rathi

India Ratings and Research (Ind-Ra) has placed Srikalahasthi Pipes Limited’s (SPL) Long-Term Issuer Rating of ‘IND AA-’ on Rating Watch Negative (RWN). The Outlook was Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Rating Watch

Rating Action

Term loan

-

-

FY27

INR3.57 (reduced from INR3.83)

IND AA-/RWN

Placed on RWN

Fund-based working capital

-

-

-

INR2.90

IND AA-/RWN

Placed on RWN

Non-fund based working capital

-

-

-

INR3.80

IND A1+/RWN

Placed on RWN

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

-

-

7-365 days

INR1.00

IND A1+/RWN

Placed on RWN

Fund-based working capital

-

-

-

INR0.3#

IND AA-/RWN

Assigned and Placed on RWN

Proposed non-fund based working capital

-

-

-

INR0.3*

IND A1+/RWN

Assigned and Placed on RWN

*The provisional ratings of the proposed bank facilities have been converted to final ratings as per Ind-Ra’s updated policy. This is because the agency notes that debt seniority and general terms and conditions of working capital facilities are likely to be the same as that of the existing ones.

# The final ratings have been assigned based on sanction documents received by the agency.

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. 

The RWN reflects the announcement of SPL’s amalgamation into ECL and the agency’s expectation that the combined entity will be weaker than standalone SPL in terms of liquidity and credit metrics. Ind-Ra believes that the merger will be more advantageous to ECL, in terms of better financial and business risk profile.

The amalgamation
scheme was approved by ECL and SPL’s respective boards on 5 October 2020. The same is underway and is awaiting approvals from the National Company Law Tribunal; the Securities and Exchange Board of India; BSE Limited; National Stock Exchange of India Limited; shareholders; creditors and other statutory authorities, as may be required. The management believes the approvals will be received over the next nine months. According to the scheme, SPL will cease to exist post the merger.


KEY RATING DRIVERS

Robust Proforma Combined Financials: The combined entity’s revenue grew 5% yoy to INR41.4 billion in FY20 (FY19: INR29.5 billion) on account of INR600/tonne improvement in realisations and 4% yoy increase in volumes. The agency expects the volumes to decline 15%-20% in FY21 owing to the COVID-19 led economic disruptions. However, given the essential infrastructure spending, the agency expects a steeper volume growth, along-with the commissioning of additional capacities, to boost the consolidated top line over FY22-FY23.

The combined entity’s operating margins have ranged between 14% and 15% over FY18-FY20 and the agency expects it to sustain around 14% for FY21, leading to a marginal stretch in credit metrics. The agency expects the net leverage (net debt/EBITDA; including acceptances) to peak around 3.25x in FY21 (FY20: 3x) before improving to 2x-2.5x over FY22-FY23 due to incremental operating cashflows and scheduled debt repayment. The agency expects the gross interest coverage (EBITDA/interest expense) for FY21 to be around the FY20’s level of 2.3x.

Strong Standalone Performance: Despite muted volume growth, SPL’s revenue grew 7% yoy to INR16.63 billion in FY20 owing to INR1,500/tonne increase in realisations.  In 1QFY21, SPL reported a lower revenue of INR2.04 billion (1QFY20: INR3.61 billion) owing to the loss of production for one-and-a-half months due to the COVID-19 led lockdown. Ind-Ra expects SPL’s revenue to decline 14%-15% yoy in FY21. SPL has been able to ramp-up its capacity utilisation to around 100% in 2QFY21 (1QFY21: sub-60%) as order execution resumed.

SPL’s FY20 margin expanded to 15.6% (FY19: 12.4%) supported by higher realisations and lower raw material costs. SPL’s blended EBITDA/tonne improved to INR9,200 in FY20 (FY19: INR5,259) due to an increase in the operational profit to INR6.1 billion (INR5.5 billion) and is expected to sustain at INR7,500-8,000. Ind-Ra expects the margin to moderate around 14% in FY21 owing to an operating loss in 1QFY21 and low realisations.

SPL’s interest coverage improved to 5.6x in FY20 (FY19: 4.8x) due to increased operating cashflows. Its net leverage, however, deteriorated to 1.1x in FY20 (FY19: 0.8x) owing to an elongation in the working capital cycle and increased debt due to the ongoing capex. Ind-Ra expects SPL’s net leverage to remain around 1x in FY21, peak to 1.5x-1.75x in FY22 due to the ongoing capex, and reduce below 1x in FY23 due to incremental cashflows from the commissioning of capex.

Liquidity Indicator - Adequate: SPL’s free cash balance stood at INR4.2 billion at end-1QFY21 (FY20: INR3.4 billion) in the form of fixed deposits and current account balance. The average utilisation of the fund-based facilities was comfortable at 60% for the 12 months ended August 2020. In FY21, SPL has a term-debt obligation of INR0.44 billion and the agency expects the same to be met out of cash accruals. The company’s cash flow from operations and fund flow from operations have been positive over FY17-FY19; however, the cash flow from operations turned negative in FY20 on account of a stretch in the working capital cycle led by COVID-19 disruptions. The agency also expects the company’s free cash flows to turn negative in FY21-FY22 owing to the planned capex.

Debt-Led Capex: SPL plans to increase its capacity of manufacturing ductile iron (DI) pipes and blast furnace to 0.5 million metric tonne per annum (mmtpa; FY20: 0.3mmtpa); the coke-oven plant to 0.35mmtpa (0.27mmtpa) and captive power generation to 17MW (14.5MW). The agency has factored in funding through a mix of debt (40%) and internal accruals (60%) for the ongoing capex and expects it to be commissioned by end-FY22 at a total cost of around INR5 billion. However, the management expects half of the expanded DI capacity to be commissioned by 1QFY22 and the balance by end-FY22.


RATING SENSITIVITIES

The RWN indicates that rating may be downgraded or affirmed. Ind-Ra will resolve the RWN within the next nine months on the completion of SPL’s merger with ECL.


COMPANY PROFILE

SPL manufactures 0.3mmtpa DI pipes at Rachagunneri (Andhra Pradesh). SPL was previously known as Lanco Industries Limited 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.

 

CONSOLIDATED FINANCIAL SUMMARY

 

Particulars

FY20

FY19

Revenue (INR billion)

41.4

39.5

Operating EBITDA (INR billion)

6.1

5.5

EBITDA margin (%)

14.8

13.9

Net leverage (x)

3.0

3.4

Interest coverage (x)

2.3

2.1

Source: SPL, ECL, Ind-Ra

 

STANDALONE FINANCIAL SUMMARY

Particulars

FY20

FY19

Revenue (INR billion)

16.6

15.6

Operating EBITDA (INR billion)

2.6

1.9

EBITDA margin (%)

15.6

12.4

Net leverage (x)

1.1

0.9

Interest coverage (x)

5.6

4.8

Source: SPL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Rating Watch

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

11 February 2020

Issuer rating

Long-term

-

IND AA-/RWN

IND AA-/Stable

Term loan

Long-term

INR3.57

IND AA-/RWN

IND AA-/Stable

Commercial paper

Short-term

INR1.0

IND A1+/RWN

IND A1+

Fund-based working capital limits

Long-term

INR3.2

IND AA-/RWN

IND AA-/Stable

Non-fund-based working capital limits

Short-term

INR4.1

IND A1+/RWN

IND A1+


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.

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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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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