| Venus Pipes and Tubes Limited | ||||||
| Ratings upgraded to 'CRISIL A- / Stable / CRISIL A2+ '; Rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its ratings on the bank loan facilities of Venus Pipes And Tubes Limited (VPTL) to ‘CRISIL A-/Stable/CRISIL A2+’ from ‘CRISIL BBB+/Stable/CRISIL A2’.
The upgrade factors in the sharp increase in the company’s scale of operations, which is expected to rise further in fiscal 2024 on account of capacity addition. The profitability is also expected to improve on account of backward integration in operations. The improvement in business risk profile should result in a healthier financial risk profile and liquidity backed by healthy cushion in net cash accrual vis-à-vis debt obligation and moderation in bank limit utilisation on account of enhancement in bank lines.
The ratings reflect the extensive experience of the promoters in the stainless steel (SS) pipe business, rising scale of operations with healthy operating margin, and healthy financial risk profile. These strengths are partly offset by exposure intense competition and large working capital requirement. |
Key Rating Drivers & Detailed Description Strengths: Experienced management and longstanding relationships with clients: The top management, which includes the promoters Mr Megharam Chaudhary, Mr Jayantiram Chaudhary, Mr Arun Kothari and Mr Dhruv Patel, has experience of over a decade in steel pipes and tubes manufacturing. This has given them a strong understanding of market dynamics and helped establish healthy relationships with suppliers and customers. Their experience has also helped the company scale up operations significantly in recent years. The company will continue to benefit from established relationships with customers, which, in turn, will help it grow strongly.
Rising scale of operations and healthy operating margin: The company had moderately healthy revenue of Rs 552 crore in fiscal 2023, up from a modest Rs 138 crore in fiscal 2019, supported by increasing capacity, successful ramp-up in operations and rising demand for its products. The company has more than doubled its capacity with addition of a hollow pipe manufacturing unit this fiscal, which will support revenue growth over the medium term.
The operating profitability also improved significantly to 12.57-12.95% in fiscals 2023 and 2022 from 6.0-6.7% during fiscals 2019 and 2020, supported by ramp-up of operations and higher-margin orders. With the hollow pipe manufacturing unit commencing operations in May 2023, the company will benefit from backward integration, which should help sustain the healthy operating margin.
Healthy financial risk profile: The capital structure is comfortable, as reflected in gearing and total outside liabilities to tangible networth ratio of 0.28 time and 0.57 time, respectively, as on March 31, 2023, aided by healthy networth of around Rs 322 crore. The networth increased significantly in the first quarter of fiscal 2023 aided by the company’s successful initial public offering (IPO).
Debt protection metrics were also adequate, as indicated by interest coverage and net cash accrual to adjusted debt ratio of 7.26 times and 0.5 time, respectively, for fiscal 2023. The interest coverage has improved over the past two fiscals aided by healthy revenue growth and improving operating profitability.
The company has completed large capital expenditure (capex) in May, 2023 for expanding capacity and manufacturing new products. The capex has been funded through funds raised through the IPO, internal accrual and moderate external debt, and will help scale up operations. Despite the capex, the financial risk profile will remain healthy over the medium term, aided by steady and healthy accretion to reserves and moderate debt. The debt protection metrics will also remain comfortable.
Weaknesses: Exposure to intense competition: The steel pipes industry is highly fragmented because of low entry barriers, and has both organised and unorganised players competing for market share. This limits the pricing capability of VPTL as the market decides the product prices.
Large working capital requirement: The company had gross current assets of 195 days driven by receivables and inventory of 47 days and 126 days, respectively, as on March 31, 2023. The company receives moderate credit from its suppliers leading to high dependence on bank limits for funding working capital. However, healthy accretion and increase in working capital limits will help the company manage rising working capital requirement as the scale of operations increases. The working capital management, however, will remain a key monitorable. |
Liquidity: Adequate VPTL will maintain adequate liquidity supported by expected net cash accrual of Rs 68-115 crore per annum against yearly debt obligation of Rs 9-11 crore over the medium term. The bank limit was utilised extensively at 89.79% on average for the 12 months through May 2023 due to large working capital requirement. The timely sanctioning of additional funds and controlled working capital cycle with increasing scale of operations will be key monitorables. The current ratio was healthy at 1.9 times as on March 31, 2023. |
Outlook: Stable CRISIL Ratings believes VPTL will continue to benefit from its promoters’ extensive industry experience and increasing manufacturing capacity along with steady demand. |
Rating Sensitivity factors Upward factors * Sustained and sharp revenue growth and continued healthy operating profitability leading to cash accrual of over Rs 80 crore * Efficient working capital management along with timely sanctioning of additional limits leading to moderation in bank limit utilisation
Downward factors * Significant drop in revenue or profitability, resulting in cash accrual less than Rs 40 crore * Significantly larger-than-expected, debt-funded capex or acquisition or stretch in the working capital cycle, weakening the financial risk profile and liquidity |
About the Company VPTL was incorporated in February 2015 by Mr Megharam Chaudhary, Mr Jayantiram Chaudhary, Mr Arun Kothari and Mr Dhruv Patel. The company is based in Bhuj, Gujarat. It manufactures SS pipes and tubes used in multiple industries. Its manufacturing facility is on the Bhuj-Bhachau highway near Dhaneti in Kutch, Gujarat, which is close to the Kandla and Mundra ports. The company has manufacturing capacity of 33,600 tonne per annum (TPA) of wielded and seamless pipes and tubes and 9,600 TPA of mother hollow pipes. |
Key Financial Indicators
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
& - CC limit is fully interchangeable with LC/FLC |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||
|
Criteria Details
|