Detailed Rationale

CRISIL ratings has removed its ratings on the bank facilities of Man Industries India Limited (MIIL), from ‘Rating Watch with Developing Implications’ and has reaffirmed its ratings at ‘CRISIL A/CRISIL A1’, while assigning a ‘Stable’ outlook to its long-term rating.

 

The rating watch has been resolved considering the CRISIL Ratings’ assessment that the forensic audit conducted by the Securities and Exchange Board of India (SEBI) on the financial statements of the company does not have material impact on the business and financial risk profile of the company.

 

The ratings had earlier been placed on watch following the announcement of the aforementioned forensic audit. MIIL had earlier received a show cause notice from SEBI in the month of August 2022, as a conclusion to the forensic audit. MIIL had decided to settle the matter with SEBI and as per the management the company is in the final stages of settlement currently. As confirmed by the management, the settlement amount will be borne by promoters and hence will not have an impact on the financial risk profile of the company. Further, the liquidity profile of the company continues to remain comfortable with cash and cash equivalents of more than Rs 200 crores as on December 31, 2023. Nevertheless, CRISIL Ratings will continue to monitor the outcome of the forensic audit and its impact on the company, if any.

 

The forensic audit, as per the company, was conducted primarily because of non-consolidation of Merino Shelters Pvt Ltd (MSPL; a fully owned subsidiary) in the books of accounts of MIIL. MIIL’s has settled the loan dues of MSPL by infusing funds of Rs 70 crores as a one-time settlement with MSPL’s lenders. MIIL is in talks with a prospective buyer for the sale of assets of MSPL. The company management has decided for consolidation of MSPL with MIIL from the current financial year i.e. fiscal 2024.

 

In fiscal 2023, the revenue has remained stable as against last year, however, operating margins declined to 6.5% from 9.9% in fiscal 2022 mainly due to low margin orders, losses due to forex and fluctuations in steel prices. During 9M fiscal 2024, the company revenue grew by 43% to Rs 2332 crores compared to 9M FY23 supported by healthy order execution. Operating margins improved to 7.8% during 9M fiscal 2024 as against 5.9% in 9M FY23. The company has healthy revenue visibility for fiscal 2024 and fiscal 2025 with an order book of Rs 1600 crores currently to be executed in the next 6-8 months. In fiscal 2024, revenue growth is expected to remain healthy above 20% with profitability improving to above 8% supported by healthy order book position.

 

The company has added new ERW (Electrical Resistance Welding) pipes capacity and the same is operational . Furthermore, capex of Rs 556 crores is planned towards setting up new stainless-steel pipes plant in Jammu and is expected to be completed by Q4 of fiscal 2025. This incremental capacity, once stabilized, is anticipated to improve the scale of operations and profitability.

 

The ratings continue to reflect the established market position of MIIL in the submerged arc welding (SAW) pipes industry along with a healthy financial risk profile. These strengths are partially offset by the working capital-intensive nature of operations and the susceptibility of the company to cyclicality in end-user industries along with volatility in raw material prices and foreign exchange (forex) rates.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has consolidated MIIL and its wholly owned as there are financial fungibilities between the companies. The entities are collectively referred to as the Man group. The subsidiaries are strategic to MIIL in view of their strong integration with its operations.

 

CRISIL Ratings consolidates the financials of Merino Shelters Private Limited with MIIL.

 

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:

• Established position in the SAW pipes industry: The domestic pipes industry is consolidated, with the top four players accounting for 80% of capacity. Limited competition is due to large capital requirement and the necessity to have critical accreditations and customer approvals. MIIL is amongst the largest SAW pipe players in India and produces both helically submerged arc welded (HSAW) and longitudinal submerged arc welded (LSAW) pipes. It has been manufacturing SAW pipes, branch pipes and coatings since 1995. 

 

• Healthy financial risk profile: The financial risk profile is expected to remain healthy with a sizeable adjusted networth of Rs 1072 crores and gearing of 0.16 time as on September 30, 2023. Interest coverage ratio is moderate at 3.31 times during 9M fiscal 2024. Liquidity is expected to remain healthy, as cash accrual is expected to comfortably meet the yearly debt obligation. The company’s ability to manage the incremental working capital requirement while maintaining comfortable gearing remains crucial, given the moderate-to-high utilisation of the fund-based limit.

 

Weaknesses:

• Susceptibility to cyclicality in end-user industries and to volatility in raw material prices and forex rates: The Man group has historically derived over 85% of the revenue from the oil and gas segment and the remaining from the water and irrigation segment. Slowdown in the oil and gas industry because of a significant decline in crude prices impacted operations in the past. Strong demand from new projects in the oil and gas segment in key markets of India and the Middle East is critical for improvement in overall operations. Any major and continued slowdown in end-user industries will weaken demand for line pipes and impact performance.

 

Furthermore, operations remain exposed to government policies and preferences with respect to factors such as local supply and trade duties. Consequently, the group’s order inflow and operating performance are highly linked to the demand prospects from these sectors. Moreover, there is a lead time of 2-4 months between the application and the final award of a tender. Because these contracts are of a fixed-priced nature, the Man group cannot pass on increases in input costs to customers after applying for the tender.

 

The company is also exposed to forex functions as reflected by the forex losses incurred by the company during fiscal 2023.

 

• Working capital-intensive operations: Gross current assets have been around 200 days in the past, driven by debtors of over 100 days. Over the medium term, the working capital requirement is expected to rise with an increase in the order book. Also, concentration in receivables renders MIIL susceptible to steady increase in the working capital requirement, and hence, remains a key monitorable.

Liquidity: Strong

Liquidity is aided by moderate fund-based working capital lines utilization and internal cash accruals; the company also avails need-based project-specific limits. Cash and cash equivalents were over Rs 200 crores as on December 31, 2023. CRISIL Ratings expects internal accrual, cash & cash equivalents, and unutilized bank lines to be sufficient to meet repayment obligation as well as incremental capex requirements.

Outlook: Stable

CRISIL believes that MIIL's credit profile will sustain in the medium term driven by healthy order book position and operating margins.

Rating Sensitivity factors

Upward factors

• Improved operating performance leading to operating margin of above 10%.
• Business risk profile improves with significant growth in outstanding order book along with diversification of product profile.
• Considerable improvement in liquidity on account of realization of non-current assets / non-core investments.

 

Downward factors

• Weak operating performance resulting in a fall in operating margins below 5%.
• Business risk profile weakens as reflected in substantial outstanding order book reduction.
• Deterioration in financial risk profile due to higher-than-expected debt funded capex or any support provided to non-business-related entities.
• Any liability due to SEBI audit observations impacting the business or financial risk profile of the company.

About the Company

MIIL is one of the largest SAW pipe players in India with combined capacity of 10 lakh tonne per annum, distributed equally between HSAW and LSAW. Incorporated in 1988, it commenced operations with the production of aluminum extrusion products. In 1995, it diversified into manufacturing SAW pipes. In March 2008, MIIL bought 55% stake in Man Infraprojects Pvt Ltd (Man Infraprojects), which undertook real estate development and increased its stake to 100% after acquiring the promoter shareholding in September 2011. In September 2013, MIIL announced a restructuring of its businesses. As part of the arrangement, with effect from April 1, 2014, Man Infraprojects was hived off from MIIL.

 

On November 22, 2021, SEBI appointed V Singhi & Associates as MIIL’s forensic auditor. As per the company, the last clarification was sought in March 2022. SEBI had responded to the forensic audit with a show cause notice to the company in August 2022, the settlement of which is sought by the company currently and is at its final stages.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size  (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash credit*	NA	NA	NA	190.00	NA	CRISIL A/Stable
NA	Letter of credit & bank guarantee**	NA	NA	NA	1483.00	NA	CRISIL A1
NA	Loan Equivalent Risk Limits	NA	NA	NA	58.00	NA	CRISIL A1
NA	Proposed Long term bank loan facility	NA	NA	NA	10.00	NA	CRISIL A/Stable
NA	Proposed Short term bank loan facility	NA	NA	NA	274.00	NA	CRISIL A1
NA	Term loan	NA	NA	March-2028	165.00	NA	CRISIL A/Stable

* Interchangeable with other fund-based and non-fund-based facilities

** Includes sub-limits for buyer's credit