Rating Rationale
April 03, 2020 | Mumbai
APL Apollo Tubes Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.770 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper programme of APL Apollo Tubes Limited (APL Apollo).

CRISIL's ratings on bank facilities & debt programme of APL Apollo continue to reflect the company's leadership position in the electric resistance-welded (ERW) pipe industry, diversified geographical presence, product profile and end use industry, and healthy financial risk profile marked by healthy debt protection metrics and prudent capital structure. These strengths are partially offset by exposure to intense competition, and volatility in raw material prices.

Operating performance in fiscal 2021 is likely to be impacted following measures taken by various state governments as well as central government towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with severe restrictions on travel and visiting areas of mass gatherings. Since these measures are imposed at a broader level and across sectors, they are expected to impact the business profile of the company in terms of temporary closure of production facility and closure of establishments of dealer-distributors-retailers. Accordingly, working capital is also expected to be elongated temporarily as a result of the lockdowns leading to pile up of inventory and slower realization of debtors. However, the same is expected to retract to normal levels once the economic activity resumes normalcy later in FY21. The ability of the business to revert back to operational stability and any relief measures given by the government will be a key monitorable, and CRISIL will continue monitoring these events.

Any disruption in operations, however, will be supported by the company's healthy financial risk profile. Liquidity is also healthy with sufficient cushion available on fund based limits of Rs 955 crore.

For 9 months ending December 2019, operating income increased by over 15% driven by volume growth of over 25% in the existing operations along with healthy ramp up of operations in Apollo Tricoat Tubes Ltd.

Analytical Approach

For arriving at the rating, CRISIL has combined two wholly owned subsidiaries of APL Apollo - Apollo Metalex Pvt Ltd and Shri Lakshmi Metal Udyog Ltd as well as one step down subsidiary - Apollo Tricoat Tubes Ltd. This is because the entities are in the same business, share common brand, and benefit from central sourcing policy. They also have fungible cash flow among them. Also, APL Apollo has guaranteed entire debt of these entities.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Leadership position in the ERW pipe industry: The Company's installed capacity has increased to 2.6 mtpa from 2.1 mtpa, which is more than 2 times its nearest competitor. Company has plants across the northern, southern, eastern and western regions. Large scale enables the company to enjoy economies of scale in procuring raw material. Also, it has better fixed cost absorption and is the price leader in the industry.

* Diversified geographical presence, product profile and end use industry: Clientele is spread across the construction, infrastructure, automobiles, and energy industries, with no single segment forming more than 20% of total revenue. Furthermore, the company has gradually reduced dependence on traditional segments (such as irrigation) and increased focus on segments (automobiles) that have better margins. Business risk profile also benefits from geographical diversity and product mix, thereby safeguarding against cyclicality and event-based risks and leading to the highest operating profit per tonne among ERW pipe manufacturers.

* Healthy financial risk profile: Networth was sizeable at over Rs 1200 crore and gearing healthy at 0.76 time estimated as on March 31, 2020. Debt protection metrics are comfortable, with interest coverage and net cash accrual to total debt ratios of 4.70 times and 0.27 time, respectively, estimated for fiscal 2020. Working capital cycle is moderate, with gross current assets of 70-90 days. Financial risk profile is expected to continue to improve over the medium term in the absence of any further large capex.

Weaknesses
* Exposure to intense competition: Fragmented industry structure due to low entry barrier has kept operating margin moderate at 5-8%. ERW industry is largely unorganized with few large organized players. Low margin, however, insulates the industry from imports. Despite having the largest capacity in the ERW segment, market share is estimated at 14-16% at present, although, estimated to increase to 18-20% in over the next 3 years.

* Exposure to volatility in raw material prices: ERW pipe manufacturers are 'steel convertors' and fluctuation in raw material prices are passed on to the consumer but with a lag of 1-2 months. Hence, margins are susceptible to fluctuations in prices of steel (Hot rolled coil) as can be seen in inventory loss of Rs 41 crores in Q3 fiscal 2019 with margins dropping 3.5%. Monthly pricing mechanism followed by the company and prudent working capital management is expected to safeguard against any significant price movements.
Liquidity Strong

APL Apollo has strong liquidity driven by expected cash accruals of more than Rs 200 crore per annum in fiscal 21 and fiscal 22 as against term debt obligations of around Rs 120 crore per annum. APL Apollo also has access to fund based limits of Rs 955 crore, which were moderately utilized at 55% over the past year. APL Apollo also has capex plan of Rs 200 crore per annum to be funded partially through debt and rest through internal accruals. CRISIL expects internal accruals, and unutilized bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirements.

Outlook: Stable

CRISIL believes that the company will be able to maintain its business risk profile despite the short term impact of COVID 19 along with maintaining adequate financial risk profile.

Rating Sensitivity Factors
Upward Factors
*Significant improvement in market share while maintaining financial risk profile.
*Significant improvement in capital structure with debt/EBITDA less than 1.5 time on a sustainable basis.

Downward Factors
*Higher than expected debt-funded capex leading to debt/EBITDA  of over 2 times on a sustainable basis
*Increased competition probably due to imports leading to pressure on margins.

About the Company

Established in 1986 in Delhi NCR, APL Apollo is a leading ERW steel tube manufacturer in India with six facilities in Sikandrabad (10 units), Uttar Pradesh; Bengaluru, Karnataka; Hosur, Tamil Nadu; Murbad, Maharashtra and Raipur, Chhattisgarh. Distribution network is spread across India, with warehouse-cum-branch offices in 20 cities and a portfolio of over 1100 products.

For the 9 months ended December 2019, the company reported a PAT of Rs 195 crore on operating income of Rs 5,835 crore, as against a PAT of Rs 87 crore on operating income of Rs 5,058 crore for the same period of previous fiscal.

Key Financial Indicators
As on/for the period ended March 31 2019 2018
Revenue Rs Crore 7164 5340
Profit After Tax (PAT) Rs Crore 148 158
PAT Margins % 2.1 3.0
Adjusted Debt/Adjusted Networth Times 0.96 0.97
Interest Coverage Times 3.57 4.20

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size (Rs.Cr) Rating Assigned with Outlook
NA Cash credit*#% NA NA NA 384.00 CRISIL AA-/Stable
NA Working capital facility## NA NA NA 60.00 CRISIL AA-/Stable
NA Working capital facility^ NA NA NA 76.00 CRISIL AA-/Stable
NA Working capital demand loan! NA NA NA 100.00 CRISIL AA-/Stable
NA Working capital demand loan NA NA NA 100.00 CRISIL AA-/Stable
NA Proposed long term bank loan facility NA NA NA 20.00 CRISIL AA-/Stable
NA Letter of credit** NA NA NA 30.00 CRISIL A1+
NA Commercial paper NA NA 7-365 days 500.00 CRISIL A1+
*Interchangeable with vendor financing scheme up to Rs 130 crore, export packing credit up to Rs 16 crore, and foreign bill discounting up to Rs 24 crore
#One way changeable from cash credit to letter of credit (LC) up to Rs 100 crore
%Interchangeable with non-fund-based facilities up to Rs 214 crore
## Interchangeable with packing credit up to Rs 60 crore; inland letter of credit up to Rs 60 crore; and performa invoice discounting up to Rs 15 crore
^Fully interchangeable with non-fund-based facilities
**100% interchangeability between LC and bank guarantee up to Rs 20 crore
!Interchangeable with Letter of Credit up to Rs 50 crore, Buyer's credit up to Rs 100 crore, Sales Invoice discounting up to Rs 50 crore, Cash Credit up to Rs 50 crore and Export credit up to Rs 50 crore
 
Annexure - List of Entities Consolidated
Type of consolidation Extent of consolidation Rationale for consolidation
Apollo Metalex Pvt Ltd, Shri Lakshmi Metal Udyog Pvt Ltd and Apollo Tricoat Tubes Ltd Full Consolidation Based on support extended to these entities in form of corporate guarantees on their bank facilities
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+      18-06-19  CRISIL A1+  28-09-18  CRISIL A1+  22-08-17  CRISIL A1+  -- 
                09-05-18  CRISIL A1+       
                29-03-18  CRISIL A1+       
                05-01-18  CRISIL A1+       
Non Convertible Debentures  LT    --    --  18-06-19  Withdrawal  28-09-18  CRISIL AA-/Stable  22-08-17  CRISIL AA-/Stable  -- 
                09-05-18  CRISIL AA-/Stable       
                29-03-18  CRISIL AA-/Stable       
                05-01-18  CRISIL AA-/Stable       
Fund-based Bank Facilities  LT/ST  740.00  CRISIL AA-/Stable      18-06-19  CRISIL AA-/Stable  28-09-18  CRISIL AA-/Stable  22-08-17  CRISIL AA-/Stable  -- 
                09-05-18  CRISIL AA-/Stable       
                29-03-18  CRISIL AA-/Stable       
                05-01-18  CRISIL AA-/Stable       
Non Fund-based Bank Facilities  LT/ST  30.00  CRISIL A1+      18-06-19  CRISIL A1+  28-09-18  CRISIL A1+  22-08-17  CRISIL A1+  -- 
                09-05-18  CRISIL A1+       
                29-03-18  CRISIL A1+       
                05-01-18  CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit*#% 384 CRISIL AA-/Stable Cash Credit*#% 384 CRISIL AA-/Stable
Proposed Long Term Bank Loan Facility 20 CRISIL AA-/Stable Proposed Long Term Bank Loan Facility 20 CRISIL AA-/Stable
Working Capital Demand Loan 100 CRISIL AA-/Stable Working Capital Demand Loan 100 CRISIL AA-/Stable
Working Capital Demand Loan! 100 CRISIL AA-/Stable Working Capital Demand Loan! 100 CRISIL AA-/Stable
Working Capital Facility## 60 CRISIL AA-/Stable Working Capital Facility## 60 CRISIL AA-/Stable
Working Capital Facility^ 76 CRISIL AA-/Stable Working Capital Facility^ 76 CRISIL AA-/Stable
Letter of Credit** 30 CRISIL A1+ Letter of Credit** 30 CRISIL A1+
Total 770 -- Total 770 --
*Interchangeable with vendor financing scheme up to Rs 130 crore, export packing credit up to Rs 16 crore, and foreign bill discounting up to Rs 24 crore
#One way changeable from cash credit to letter of credit (LC) up to Rs 100 crore
%Interchangeable with non-fund-based facilities up to Rs 214 crore
##Interchangeable with packing credit up to Rs 60 crore; inland letter of credit up to Rs 60 crore; and performa invoice discounting up to Rs 15 crore
^Fully interchangeable with non-fund-based facilities
**100% interchangeability between LC and bank guarantee up to Rs 20 crore
!Interchangeable with Letter of Credit up to Rs 50 crore, Buyer's credit up to Rs 100 crore, Sales Invoice discounting up to Rs 50 crore, Cash Credit up to Rs 50 crore and Export credit up to Rs 50 crore
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Steel Industry
CRISILs Criteria for Consolidation

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