CRISIL has assigned its bank loan ratings of ‘BBB+/Stable/P2’ to the various bank facilities of Tube Products Incorporate (TPI). The ratings reflect the healthy growth prospects of the end-user industry, TPI’s established market position in the domestic pipe fittings industry, and its comfortable financial risk profile. These rating strengths are partially offset by the small size of the market that TPI operates in, the competition it faces from unorganised players, and the working capital-intensive nature of its business.

The oil and gas industry is a major end-user of pipe fittings, and accounted for around 70 per cent of TPI’s revenues in 2006-07 (refers to financial year, April 1 to March 31). The demand for pipe fittings is expected to register a strong compounded annual growth rate (CAGR) of about 15 per cent over the next three to five years, driven by increase in exploration and production activities and gas discoveries. TPI is one of the largest players in the domestic organised pipe fittings market, with a market share of more than 50 per cent in the organised segment. This is reflected in its healthy order book position of Rs.860 million as on December 31, 2007. TPI, with its established position in the pipe fittings industry, is well positioned to benefit from the healthy growth of the end-user industry. TPI’s financial risk profile is marked by strong improvement in cash accruals, healthy debt protection measures, and a moderate gearing level with a small net worth base. Over the past four years, TPI’s operating income has registered a strong compounded annual growth rate of 47 per cent. This, along with comfortable operating margins, has resulted in strong cash accruals (expected to be at Rs.100 million in 2007-08). The interest coverage and net cash accruals to total debt ratios for 2007-08 are estimated at 6 times and 0.36 times, respectively, up from around 2 times and 0.12 times, respectively, in 2003-04. TPI has a moderate gearing level, estimated at around 1.1 times as on March 31, 2008. Also, TPI has a small net worth base, estimated at Rs.260 million as on March 31, 2008.

However, steel-pipe fitting is a small industry with a large number of unorganised players. CRISIL believes that TPI will continue to face stiff competition from the unorganised players. The company has high working capital requirements, with gross current assets of 171 days as on March 31, 2007. CRISIL believes that the high working capital requirements will continue to restrict significant improvements in TPI’s capital structure over the medium term.

Outlook: Stable
CRISIL expects TPI to maintain its established position in the domestic pipe fittings industry and benefit from healthy growth prospects of the end-user industry. The outlook may be revised to ‘Positive’ if TPI strengthens its market position while maintaining a healthy capital structure. Conversely, any large additional debt-funded capex or acquisition, leading to deterioration in the financial risk profile, may result in a revision of the outlook to ‘Negative’.

About the company
TPI was established in 1982 as a partnership firm. In 1990 it was converted into a proprietorship concern with Topack Fitting Ltd (TFL) as the sole proprietor. TPI is engaged in the manufacture and export of stainless steel, alloy steel, and carbon steel pipe fittings (seamless and welded), and flanges. Its products include elbows, tees, reducers, caps, crosses, and stub ends. TPI caters to the pipe fittings requirements of the gas and oil, petrochemicals, water and energy, and other process industries, with the oil and gas industry accounting for nearly 70 per cent of its revenues. TPI had a profit after tax (PAT) of Rs.40 million on net sales of Rs.1123 million in 2006-07, as against a PAT of Rs.50 million on net sales of Rs.792 million in 2005-06.