Rating Rationale
April 08, 2020 | Mumbai
Apollo Tricoat Tubes Limited
'CRISIL AA-/Stable' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.245 Crore
Long Term Rating CRISIL AA-/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA-/Stable' rating to the bank facilities Apollo Tricoat Tubes Limited (ATTL).

The rating reflects ATTL's quick ramp up in revenue, strong support from its ultimate parent APL Apollo Tubes Ltd (APL Apollo; 'CRISIL AA-/Stable/CRISIL A1+'), diversified cash flows and comfortable financial risk profile. These rating strengths are partially offset by fragmented nature of industry leading to intense competition in sector.

Fiscal 2020 was the first year of operations for the company since being acquired by APL Apollo, as earlier operations were discontinued in fiscal 2019 itself. Operations have ramped up at a healthy pace with company recording revenues of Rs 435 crore, at a healthy operating margin of 11.6% for 9 months ending December 2019. In fiscal 2020, ATTL set up a capacity of 2,50,000 tonnes to produce steel pipes, flanges and other allied products, which it plans to increase to 3,00,000 tonnes in fiscal 2021. ATTL is expected to complement the product portfolio of APL Apollo with higher margin products which can benefit from APL Apollo's established brand and distribution network. 
 
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. 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 and support from its ultimate parent, APL Apollo.

Analytical Approach

The ratings factor in the strong operational, financial and technological support ATTL receives from its ultimate parent, APL Apollo. In fiscal 2020, Shri Lakshmi Metal Udyog Ltd ('CRISIL AA-/Stable/CRISIL A1+'), a 100% subsidiary of APL Apollo acquired 50.7% stake in ATTL. Going forward CRISIL expects Shri Lakshmi Metal Udyog to steadily increase its stake in ATTL.

Key Rating Drivers & Detailed Description
Strengths
* Quick ramp up in operations: ATTL has estimated to record revenue of over Rs 600 crore in its first year of operations itself i.e. fiscal 2020. It set up a capacity of 250,000 tonnes in fiscal 2020 for the manufacture of products such as In-line Galvanising pipes, scaffolding pipes, electrical conduits etc. These products are an extension of APL Apollo's existing product portfolio into higher margin products, with steady state ATTL margins expected to be 11-12% as compared to that of APL Apollo at 5-6%. 

* Comfortable financial risk profile: Networth is healthy estimated at Rs 193 crore with gearing of 0.75 times as on March 31, 2020. Debt protection metrics are healthy with NCATD of over 0.3 time as on March 31, 2020. Further, working capital cycle is also healthy with gross current asset days of 80-90days.

* Strong Support from parent: ATTL benefits from the operational, technological, and financial support it receives from its ultimate parent, APL Apollo, which has stated that the company will increase its shareholding and maintain management control over the medium term. ATTL also benefits from the strong distributer network and established brand of APL Apollo. All bank limits of ATTL are backed by a corporate guarantee from APL Apollo. Strong moral obligation, as reflected in board representation, shared name, technological support, majority ownership, and common bankers, along with economic incentive as ATTL products are brand extention of APL Apollo portfolio into higher margin products lends further comfort.

Weaknesses
* 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). Monthly pricing mechanism followed by the company and prudent working capital management is expected to safeguard against any significant price movements.
Liquidity Strong

ATTL has healthy liquidity driven by expected cash accruals of more than Rs 40 crore per annum in fiscal 21 and fiscal 22 as against term debt obligations of Rs 10 and Rs 20 crore respectively.  ATTL also has access to fund based limits of Rs 135 crore, which were moderately utilized at 31% over the past year. 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.
* Improvement in credit risk profile of the ultimate parent APL Apollo by at least one notch

Downward Factors
* Higher than expected debt-funded capex impacting the financial risk profile of the company
* Increased competition probably due to imports leading to pressure on margins
* Weakening of APL Apollo's credit risk profile or a material decline in SLMUL's shareholding or support philosophy towards ATTL.

About the Company

Apollo TriCoat (formerly known as Best Steel Logistics) became a part of APL Apollo tubes group, India's leading steel pipe and tube manufacturer in FY 2019. The company's products find their usage in myriad applications from green house tubing to rooftop sheds and electrical conduits where triple coated technology is being used as a substitute for PVC pipes worldwide.

For the 9 months ended December 2019, the company reported a PAT of Rs 31 crore on operating income of Rs 435 crore.

Key Financial Indicators
As on/for the period ended March 31 2019 2018
Revenue Rs Crore 9 191
Profit After Tax (PAT) Rs Crore 3 7
PAT Margins % 28.2 3.7
Adjusted Debt/Adjusted Networth Times 0.42 0.00
Interest Coverage Times 319 6.32

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 Fund Based Facilities* NA NA NA 135 CRISIL AA-/Stable
NA Term Loan NA NA Dec-2025 110 CRISIL AA-/Stable
*Interchangeable with Non-fund based limits 
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
Fund-based Bank Facilities  LT/ST  245.00  CRISIL AA-/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities* 135 CRISIL AA-/Stable -- 0 --
Term Loan 110 CRISIL AA-/Stable -- 0 --
Total 245 -- Total 0 --
*Interchangeable with Non-fund based limits
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Steel Industry
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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