Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/Positive/CRISIL A1+' ratings on the bank loan facilities, non-convertible debentures and commercial paper of Welspun Corp Ltd (WCL; part of the WCL group).

 

The ratings factor in the recently announced capital expenditure (capex) by the group towards setting up greenfield units under the wholly owned subsidiary of Sintex-BAPL Ltd (SBAPL) Sintex Advance Plastics Ltd (SAPL), for manufacturing plastic pipes. Though the capex will be partially debt-funded, the financial risk profile of the group will remain strong, with healthy networth and gearing (expected below 1 time) and comfortable debt protection metrics.

 

The business risk profile continues to be strong, supported by healthy scale of operations and profitability from the legacy line pipe segment and continued ramping-up of operations in recent investments. The recently announced capex will support the group to diversify its revenue streams over the medium term. Continued ramp up in the diversified business segments leading to significant contribution to operating profit and return on capital employed (RoCE) will improve the business risk profile of the group.

 

The ratings continue to reflect the group’s strong business risk profile, backed by leading position in the global steel line pipe business, geographically diversified capacities, steady order flow and prudent risk management strategies. The ratings also factor in strong financial risk profile, aided by large networth and ample liquidity. These strengths are partially offset by susceptibility to slowdown in end-user industries, exposure to regulatory risks and stabilisation of recently completed capex.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of WCL and its subsidiaries, collectively referred to as the WCL group. The group comprises Welspun Pipes Inc (WPI), Welspun Mauritius Holdings Ltd (WMHL), Welspun Tradings Ltd (WTL), Welspun Metallics Ltd (WML), Welspun DI Pipe Ltd (WDL), Anjar TMT Steel Pvt Ltd (ATMT), Welspun Specialty Solutions Ltd (WSSL), Mahatva Plastic Products and Building Materials Pvt Ltd (MPPBM), Nauyaan Shipyard Pvt Ltd (NSPL), Welspun Global Trade LLC, USA (WGTU), Sintex-BAPL Ltd (SBAPL) and Sintex Prefab and Infra Ltd (SPIL). These entities are strategically important to, and have significant operational integration with, WCL.

  

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:

• Strong business risk profile, supported by market leadership in the line pipe business and diversification into other business segments: The WCL group is one of the largest players in the global steel line pipe business with capacities of 1,780 kilo tonne per annum (ktpa) (2,155 ktpa including Saudi operations). It has a track record of over two decades and demonstrated technical capabilities in the supply of high-grade line pipes for critical and large projects in the oil and gas and water and sanitation segments. It has established relationships with reputed overseas customers and with all major oil and gas players in the domestic market. Furthermore, limited competition owing to large capital requirement and necessity to have critical accreditations and customer approvals bolster the business risk profile. Performance will be supported by improving global demand, and strong orderbook of MS line pipes of 611 kilo tonne as on September 2023 (in India and the US) offering healthy revenue visibility. The business risk profile of the group is further supported by diversification through semi-integrated greenfield projects of ductile iron (DI) pipe and thermo-mechanically treated (TMT) bars along with the acquisition of SBAPL. Further, the company has planned to commence manufacturing of plastic pipes by setting up greenfield facilities, which will be operational from fiscal 2026. In the first half of fiscal 2024, the company achieved revenue of 20-30% from these segments and continued ramping up of these business segments leading to significant contribution to operating profit should further improve the business risk profile of the group, which will remain a key monitorable over the medium term.

 

• Geographically diverse capacities and presence: The group’s presence is diversified with facilities in India and US, which enables it to cater to geographically diverse customers, counter protectionist policies in some global markets, and guard against economic downturns in specific regions. The geographically diversified presence mitigates the concentration risk, which is extremely critical in the steel line-pipe segment. The group also has the flexibility to manufacture pipes at any of its facilities as all units have necessary certifications and accreditations, which lends support to overall operations.

 

• Prudent risk management strategies: The group has prudent risk management policies for different regions. In India, the group purchases raw material back-to-back and maintains order-backed inventory, which mitigates price fluctuation risk of the key input, steel. In the US, it has pass-through agreements and changes in steel prices are passed on to customers. Also, majority of domestic sales are backed by letters of credit or bank guarantees, which partially offset counterparty risks.

 

• Strong financial risk profile and ample liquidity: Networth was healthy at Rs 5,050 crore as on September 30, 2023 (Rs 4,487 crore as on March 31, 2023), and gearing comfortable at 0.38 time as on the same date (0.74 time as on March 31, 2023). Total outside liabilities to adjusted networth (TOLANW) ratio increased to 2.3 times as on March 31, 2023, but is expected to improve over the medium term despite planned debt-funded capex, driven by steady accretion to reserve, repayment of loans and moderate reliance on external debt. Cash and equivalent and other marketable securities stood at Rs 1,565 crore as on September 30, 2023, which will cushion liquidity. Adjusting for such surplus, net gearing reduced to 0.07 time as on September 30, 2023. Interest coverage ratio improved to 6.2 times in the first half of fiscal 2024 from 3.4 times in fiscal 2023 driven by better profitability and moderate leverage, and will remain healthy over the medium term.

 

Weaknesses:

• Susceptibility to slowdown in end-user industries and changes in government policies: The group derives 50-60% of revenue from the oil and gas segment, and the remaining from the water segment in the line pipe business. Slowdown in the oil and gas industry because of significant decline in crude prices impacted operations. The segment is cyclical. Sustained demand for new projects in the oil and gas segment in key markets of the US and India is critical to sustain 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.

 

• Exposure to risks related to stabilization of capex incurred in the past fiscal and projects planned over the medium term: The group had undertaken capex for ductile iron pipes facility, TMT bars facility as well as acquisition of SBAPL. Due to heavy investments during the past two fiscals, RoCE weakened to 7% in fiscal 2023. These segments started ramping up in fiscal 2024 as reflected by 15.7% for YTD Dec’23 (9 months) and will continue to ramp up over the medium term with healthy contribution of operating profit from these segments, leading to improvement in RoCE. The company is setting up a greenfield facility for plastic pipes under SBAPL, and operations for which are expected to commence from fiscal 2026. Timely completion and stabilisation of the recently added capex as well as upcoming capex while generating healthy profitability will remain a key monitorable over the medium term.

Liquidity: Strong

The WLC group has strong liquidity, driven by healthy cash accrual against debt obligation. Further, the group had healthy unencumbered cash and equivalent and investments of Rs 1,565 crore and bank balance of Rs 59.95 crore as on September 30, 2023. It has repaid preference shares of Rs 351.51 crore as on September 30, 2023, and of Rs. 200 crore as on February 09, 2024 and has sufficient funds for the upcoming repayments of term debt obligation. Working capital bank lines were utilised moderately at 67% during the 12 months through December 2023. The group can fund its repayment obligation and incremental working capital requirement through internal cash accrual, unutilized bank lines and surplus cash.

 

Environment, social and governance (ESG) profile

The ESG profile of WCL supports its strong credit risk profile.

 

The steel pipe manufacturers have a high impact on environment driven by high power consumption during their manufacturing process. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners, and due to its nature of operations affecting local community and health hazards involved. WCL has been focusing on mitigating its environmental and social risks.

 

Key ESG highlights:

• WCL has set a target to become carbon neutral by 2040 and to use 20% renewable energy by 2030.
• It has set a target of 0.55 KL/MT and 0.40 KL/MT for fiscal 2025 and 2030, respectively. It has also set a target to become water neutral by 2040.
• It has set a zero waste to landfill (ZWL) target of 2030 and has achieved this target in fiscal 2023.
• 100% of identified critical suppliers were assessed on WCL supplier code of conduct, and the company has a target to assess 100% of critical suppliers on ESG parameters by 2025.
• The company’s governance structure is characterised by having ESG and CSR committees at top levels, Managing Director/CEO at the second level and designated employees at the bottom.
• The company is now ranked amongst the top 5 percentile of global companies in the Steel sector in S&P Global’s Corporate Sustainability Assessment along with achieving top 1 percentile ranking on its Governance score.
• The company achieved a total ESG score of 66 across the parameters, a 16 percent increase from its previous score of 57.

 

There is growing importance of ESG among investors and lenders. The commitment of WCL to the ESG principles will play a key role in enhancing stakeholder confidence given access to domestic capital market.

Outlook: Positive

The credit risk profile of the WCL group will continue to improve over the medium term driven by its leading position and healthy order book in the line pipe segment, ramping up of operations in diversified segments, comfortable financial risk profile and ample liquidity.

Rating Sensitivity Factors

Upward factors:

• Sustained and strong bottom-line contributions from the recent diversifications while the existing line pipe business continues to grow at a healthy CAGR without any major deviation in profitability leading to a ramp up in ROCE levels to around 20-22% over the medium term.
• Improvement in the working capital cycle and financial risk profile, resulting in gross debt to operating earnings before interest, tax, depreciation and amortisation (Ebitda) ratio below 1.5 time

 

Downward factors:

• Delayed ramp up the diversified business segments leading to annual consolidated operating EBIDTA of less than Rs 1500 crores over the medium term
• Weakening of financial risk profile because of increase in working capital requirement or unanticipated debt funded acquisition or capex, leading to TOL/ANW ratio above 1.6 times

About the Group

Incorporated in 1995, WCL is the flagship company of the Welspun group promoted by Mr B K Goenka. The company manufactures line pipes at its plants in India (Anjar in Gujarat, Bhopal in Madhya Pradesh and Mandya in Karnataka), the US (Little Rock, Arkansas), and the Kingdom of Saudi Arabia (Dammam). Products include longitudinal, spiral and high-frequency induction-welded pipes. WCL also has coating facilities in these countries.

 

The company operates in the US through its 100% subsidiary, WPI; and in KSA through step-down subsidiary, EPIC (erstwhile Welspun Middle East Pipe Company LLC; merged with Welspun Middle East Pipe Coating Company LLC in fiscal 2021). It also has a 100% subsidiary, Welspun Tradings Ltd, which acts as a bidding company in the global market.

 

Operations are managed by a professional team, headed by Mr Vipul Mathur, Managing Director and CEO.

Status of non-cooperation with previous CRA

WCL has not co-operated with Brickwork Ratings India Pvt Ltd, which has classified the company as non-cooperative through circular dated October 6, 2023. The reason provided by Brickwork Ratings India Pvt Ltd is non furnishing of information for monitoring of ratings. 

Any other information: Not Applicable