Rating Rationale
September 04, 2020 | Mumbai
Welspun Corp Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.5825 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.90 Crore Non Convertible Debentures (Reduced from Rs.990 Crore) CRISIL AA/Stable (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 ratings on the bank facilities and debt programmes of Welspun Corp Limited (WCL; a part of the Welspun group) at 'CRISIL AA/Stable/CRISIL A1+'. CRISIL has withdrawn its ratings on the non-convertible debentures of Rs 900 crore of the company as they have been redeemed. The withdrawal is in line with CRISIL's policy of rating withdrawal.
 
CRISIL had upgraded the rating on the long term  bank facilities and non convertible debentures of WCL to 'CRISIL AA/Stable' from 'CRISIL AA-/Positive' and rating on the short-term bank facilities and commercial paper reaffirmed at 'CRISIL A1+' vide rating rationale dated August 31, 2020.

The upgrade reflects the strengthening of the Welspun group's business risk profile, backed by improvement in capacity utilisation in all the three regions - India, the US and Kingdom of Saudi Arabia (KSA) leading to strong revenue growth and better operating profitability. Revenue increased by 29% in fiscal 2020, while consolidated operating margin improved to 14.3% from 7.7% a year earlier. Profitability improvement was driven by strong operating margins in the KSA unit, which has historically been a drag on profitability.
 
Despite Covid-19-led disruptions across geographies, the group may not face any major moderation in its revenue profile, backed by steady order book movement and a reasonable performance in the first quarter of fiscal 2021. In the first quarter, the group recorded consolidated revenue of more than Rs 2,300 crore, with outstanding orders worth 0.8 million kilo tonne as on date. 
 
The financial risk profile has further strengthened with prepayment of debt in the first quarter of fiscal 2021. Given healthy cash generation and progressive debt repayment, capital structure is expected to remain healthy with net gearing (debt less unencumbered cash to networth) of less than 0.5 time as on March 31, 2021. Liquidity is expected to remain strong, backed by strong cash flow, and management stance of maintaining surplus cash and cash equivalent of more than Rs 500 crore at any given time.
 
The ratings continue to reflect a strong business risk profile, backed by leadership position in the global steel line-pipe business, geographically diverse capacities, a steady order flow, expected sustained improvement in operating margin, and prudent risk-management strategies. The ratings also factor in a strong financial risk profile, marked by large networth, comfortable capital structure, the commitment of the management towards controlling external debt and ample liquidity. These strengths are partially offset by susceptibility to any slowdown in end-user industries and to government regulations.

Analytical Approach

For arriving at the ratings, CRISIL has consolidated the business and financial risk profiles of WCL and its subsidiaries, Welspun Mauritius Holdings Ltd, Welspun Pipes Inc (WPI), and Welspun Tradings Ltd; and step-down subsidiaries, Welspun Middle East Pipe Company LLC (WMEP), Welspun Middle East Pipe Coating Company LLC (WMEC), Welspun Tubular LLC, and Welspun Global Trade LLC. That is because all these entities, together referred to as the Welspun group, have the same business, brand, and management, and significant financial and operational linkages.
 
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
The Welspun group is one of the largest players in the global steel line-pipe business with capacities of 2,555 kilo tonne per annum (ktpa) and consistent sales of more than 1,000 ktpa. It has a track record of over two decades and demonstrated technical capability in supply of high-grade line pipes for critical and large projects in the oil and gas and water and sanitation segments. The group has established relationships with reputed overseas customers such as Transcanada Pipelines Ltd, Shell, TOTAL, Kinder Morgan, Saudi Arabian Oil Company, Qatar Petroleum, Petroliam Nasional Berhad (Petronas) and Kuwait Oil Company. It also supplies line pipes to all major players in the domestic market such as Bharat Petroleum Corporation Ltd, Indian Oil Corporation Ltd, Gas Authority of India Ltd, Reliance Industries Ltd, Gujarat State Petronet Ltd, Adani Gas Ltd, TATA Projects Ltd and Larsen & Toubro Ltd. Furthermore, limited competition due to large capital requirement, and necessity to have critical accreditations and customer approvals, bolster the business risk profile. Future performance will be supported by improving global demand, and healthy orders of 850 kilo tonne as on August 2020 offering adequate revenue visibility.
 
* Geographically diverse capacities and presence
The group has multi-location presence with facilities in India, the US, and KSA, 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. Furthermore, the group 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 a prudent risk management policy for different regions. In India, the group purchases raw material back-to-back and maintains an order-backed inventory, which mitigates price fluctuation risk of the key input, steel. In the US, the group has a pass-through agreement and all changes in steel prices are passed on to the customers. In KSA, since the contracts are for longer tenure of two years, the group hedges its commodity risk for six months through forward contracts. Moreover, since the contracts in KSA do not have price-escalation clauses, the group has been building the risk premium to cover for steel price fluctuations at the time of bidding for the contracts. Also, majority of domestic sales are backed by letters of credit or bank guarantees, which partially offset counter-party risks.
 
* Strong financial risk profile and ample liquidity
Networth was healthy at Rs 3,456 crore as on March 31, 2020, with gearing and total outside liabilities to adjusted networth (TOL/ANW) ratio comfortable at 0.63 time and 1.81 times, respectively. Unencumbered cash and bank balance and liquid investments of Rs 1,046 crore as on March 31, 2020, provide significant cushion to overall liquidity. Adjusting for such surplus, net gearing and net TOL/ANW ratio reduce further to 0.33 time and 1.51 times, respectively. Net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio was also comfortable at 0.32 time as on March 31, 2020. Management has committed to maintaining a net gearing below 0.7 time and a net debt to EBITDA ratio below 2 times. Interest coverage ratio was adequate at 10.1 times in fiscal 2020. With NCD and loan prepayment, no major, debt-funded capital expenditure (capex), and healthy cash accrual, the financial risk profile is expected to improve further over the medium term.
 
Weaknesses
* Susceptibility to slowdown in end-user industries, and to government policies
The group has historically derived 60-70% of revenue from the oil and gas segment, and the remaining from the water segment. Slowdown in the oil and gas industry because of a significant decline in crude price had impacted operations in the recent past. Amid the pandemic-induced slowdown in oil prices in March 2020, the group witnessed deferment of few orders by customers in the fourth quarter of fiscal 2020. Revival of new projects in oil and gas segment in the key markets of US and Middle East is critical to sustain 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 such as local supply and trade duties.
Liquidity Strong

The Welspun group has strong liquidity, driven by expected cash accrual of more than Rs 550 crore per annum each in fiscals 2021 and 2022, against yearly repayment obligation of around Rs 357 crore and Rs. 63 crore, respectively. Unencumbered cash and cash equivalents were Rs 1,046 crore as on March 31, 2020, which currently reduced to Rs 677 crores due to prepayment of debt. WCL also has access to fund-based limit of Rs 290 crore, which remained modestly utilised at 7% average over the 12 months ended June 2020. The group can fund its repayment obligation and capex requirement (if any) through internal cash accrual. Currently, the group has NCDs outstanding of Rs 90 crores as on date.

Outlook: Stable

The Welspun group's leadership position in the line-pipe segment, a diversified global presence, and a healthy order book should continue to help maintain revenue growth and profitability over the medium term. A prudent funding mix and commitment towards maintenance of the capital structure and debt coverage will ensure sustenance of the financial risk profile.

Rating Sensitivity Factors
Upward Factors
* Strengthening of business risk profile, driven by diversification of end-user segment while sustaining revenue growth and consolidated operating profitability at over 15%
* Better capital structure, with reduction in TOL/ANW ratio (net-off cash) to below 1 time

Downward Factors
* Decline in profitability below 10% because of increase in raw material prices or lower realisations
* 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 2 times.

About the Group

Incorporated in 1995, WCL is the flagship company of the Welspun group promoted by Mr B K Goenka. It manufactures line pipes at its plants in India (Dahej and Anjar in Gujarat, Bhopal in Madhya Pradesh and Mandya in Karnataka), the US (Little Rock, Arkansas), and KSA (Dammam). Products include longitudinal, spiral, and high-frequency induction-welded pipes. WCL also has coating facilities in the three countries.
 
The company operates in the US through its 100% subsidiary, WPI; and in KSA through step-down subsidiaries, WMEP and WMEC. It also has a 100% subsidiary, Welspun Tradings Ltd, which acts as a bid arm in the global market.
 
Operations are managed by a professional team, headed by Mr Vipul Mathur, Managing Director and Chief Executive Officer.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs.Cr 13285 10301
Profit After Tax (PAT) Rs.Cr 890 -103
PAT Margins % 6.7 -1.0
Adjusted Debt/Adjusted Networth Times 0.63 0.72
Interest coverage Times 10.1 3.4

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Complexity level Issue size
(Rs.Cr)
Rating assigned
with outlook
INE191007139 Non- Convertible Debentures 09-Nov-2012 11% 08-Nov-2022 Simple 90 CRISIL AA/Stable
NA Commercial Paper NA NA 7-365 Days Simple 500 CRISIL A1+
NA Letter of Credit NA NA NA NA 3490 CRISIL A1+
NA Bank Guarantee NA NA NA NA 1033 CRISIL A1+
NA Proposed Letter of Credit & Bank Guarantee NA NA NA NA 1212 CRISIL A1+
NA Cash Credit NA NA NA NA 90 CRISIL AA/Stable
 
Annexure - Details of Rating Withdrawn
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Complexity level Issue Size (Rs.Crore)
NA Non-Convertible Debenture* NA NA NA Simple 900
*Yet to be issued
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Welspun Corp Limited Full Parent company
Welspun Mauritius Holdings Ltd Subsidiary company
Welspun Pipes Inc (WPI) Subsidiary company
Welspun Tradings Ltd Subsidiary company
Welspun Middle East Pipe Company LLC (WMEP) Step-Down subsidiary company
Welspun Middle East Pipe Coating Company LLC (WMEC) Step-Down Subsidiary Company
Welspun Tubular LLC Step-Down Subsidiary Company
Welspun Global Trade LLC Step-Down Subsidiary Company
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+  31-08-20  CRISIL A1+  09-10-19  CRISIL A1+  27-07-18  CRISIL A1+  16-08-17  CRISIL A1+  -- 
            12-04-19  CRISIL A1+           
Non Convertible Debentures  LT  90.00
04-09-20 
CRISIL AA/Stable  31-08-20  CRISIL AA/Stable  09-10-19  CRISIL AA-/Positive  27-07-18  CRISIL AA-/Stable  16-08-17  CRISIL AA-/Stable  -- 
            12-04-19  CRISIL AA-/Stable           
Fund-based Bank Facilities  LT/ST  90.00  CRISIL AA/Stable  31-08-20  CRISIL AA/Stable  09-10-19  CRISIL AA-/Positive  27-07-18  CRISIL AA-/Stable  16-08-17  CRISIL AA-/Stable  -- 
            12-04-19  CRISIL AA-/Stable           
Non Fund-based Bank Facilities  LT/ST  5735.00  CRISIL A1+  31-08-20  CRISIL A1+  09-10-19  CRISIL A1+  27-07-18  CRISIL A1+  16-08-17  CRISIL A1+  -- 
            12-04-19  CRISIL A1+           
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
Bank Guarantee 1033 CRISIL A1+ Bank Guarantee 1033 CRISIL A1+
Cash Credit 90 CRISIL AA/Stable Cash Credit 90 CRISIL AA/Stable
Letter of Credit 3490 CRISIL A1+ Letter of Credit 3490 CRISIL A1+
Proposed Letter of Credit & Bank Guarantee 1212 CRISIL A1+ Proposed Letter of Credit & Bank Guarantee 1212 CRISIL A1+
Total 5825 -- Total 5825 --
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
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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