Detailed Rationale

Crisil Ratings has upgraded its rating on the long-term bank facilities of Electrosteel Castings Limited (ECL) to ‘Crisil AA/Stable’ from ‘Crisil AA-/Positive’ while reaffirmed its ‘Crisil A1+’ rating on the short-term bank facilities. Crisil Ratings has also assigned its ‘Crisil A1+’ rating to the commercial paper.

 

The group is one of the largest players in the DI pipe segment with total DI pipe manufacturing capacity of around 8,00,000 metric tonnes per annum (MTPA) as on December, 2024 along with integrated manufacturing capacities across pig Iron, sponge iron, coke amongst others.

 

The upgrade reflects improvement in business risk profile of the company with revenue of Rs 7487 crore in fiscal 2024 exhibiting 3% growth as against the previous year owing to healthy order flow and volumetric growth on the back of robust demand scenario. The company has continued its growth momentum in fiscal 2025 with revenue recorded of around Rs 3840 crore in the first six months and estimated revenue of around 7,700 crore for the whole fiscal backed by major order book execution in Q4 of the fiscal as observed over the past few fiscals. ECL is expected to improve its revenue profile over the medium term backed by a healthy outstanding order book for the next 6-9 months which provides healthy revenue visibility and healthy capacity utilization and benefits to be availed from enhanced capacities which shall in turn support healthy volumetric growth amid sustenance of healthy demand scenario from end-user segments. Operating efficiency remains supported by increased economies of scale, healthy finished product realisations amid healthy demand and moderated raw material prices (coking coal and iron ore) with healthy adjusted return on capital employed (ROCE) expected around 16-17% over the medium term supported by reduced reliance on external working capital debt. Operating profitability is expected to be sustained at an improved level of 17% over the medium term backed by moderated input prices and better economies of scale through increased scale of operations and will remain a key monitorable.

 

The ratings remain underpinned by robust financial risk profile and ample liquidity. The group has sustained healthy net debt status despite adding sizeable capacities and showcasing significant growth in scale over the last few fiscals. Liquidity is marked by healthy unencumbered cash and liquid investments and healthy cash generation expected over the medium term.

 

The ratings continue to reflect established market position of the group in the DI pipe industry, healthy operating efficiency driven by integrated operations and prudent working capital management and robust financial risk profile. These strengths are partially offset by exposure to volatility in the prices of inputs and finished goods and exposure to inherent cyclicality and inherent slowdown in the end user industry.

Analytical Approach:

For arriving at its ratings, Crisil Ratings has combined the business and financial risk profiles of ECL and its subsidiaries, collectively referred to as the Electrosteel group. The group comprises Electrosteel Castings Limited, Electrosteel Europe SA, Electrosteel Algerie SPA, Electrosteel Castings (UK) Limited, Electrosteel USA LLC, Electrosteel trading, S.A., Electrosteel Castings Gulf FZE, Electrosteel Doha for Trading LLC, WaterFab LLC (subsidiary of Electrosteel USA, LLC), Electrosteel Brazil Ltda. Tubos e Conexoes Duteis, Electrosteel Bahrain Holding W.L.L., Electrosteel Bahrain Trading W.L.L. (a subsidiary of Electrosteel Bahrain Holding W.L.L.) including 5% shares held through beneficial trust and Singardo International.

 

This is because as all these entities have common management, significant financial linkages and are in the same business.

 

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 market position supported by leadership position in the industry, experienced management and reputed clientele base: The Electrosteel group is one of the largest players engaged in the manufacturing of DI pipes with combined capacities of DI pipes at ~8,00,000 metric tonnes per annum (MTPA) as on December, 2024. The promoters have been associated in the industry for over five decades and their extensive experience has helped them gain significant market presence, expand product capacities and have established forward as well as backward integrated operations. The facility is already utilised by over 90% and ECL plans to further add capacity of more than 2,00,000 metric tonne per annum (MTPA) over the next fiscal. Diversified product mix also includes DI fittings, CI pipe, pig iron, sponge iron, ferro alloy, cement, coke amongst others. Market position is marked by substantial growth in scale of operations backed by robust volumetric growth through enhanced capacities, group being in continuous expansion mode and healthy demand scenario through government’s schemes of Jal Jeevan Mission (JJM), Har Ghar Nal se Jal and AMRUT 2.0 with the aim of providing tap water connections to rural as well as urban households. The company maintains strong trade relationships with reputed overseas customers and all major players in the domestic market. Limited competition, owing to large capital requirement and necessity to have critical accreditations and customer approvals, bolster the business risk profile. Performance is further supported by improving global and domestic demand, as reflected in a strong order book providing healthy revenue visibility.

 

The group’s presence is diversified with facilities in India and overseas, 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 DI pipe segment. Furthermore, the group has two dedicated manufacturing facilities to manufacture DI pipes, one each in Eastern as well as Southern India, both having necessary certifications and accreditations enabling it to have a PAN India presence well supported by three additional facilities for backward integration which lends support to overall operations.

 

Order book which is to be executed over the next 6-9 months provides healthy revenue visibility in the near term. Group has recorded a healthy consolidated turnover of around Rs 7487 crore in FY2024 backed by ~5% volumetric growth and is looking well poised to close fiscal 2025 at a consolidated turnover of around Rs 7,700 crore with Rs 3839 crore already recorded till H1FY2025. Led by infrastructural push, given accrued benefits from operationalization of recent capacity expansion, and planned capacity addition going forward over the next fiscal backing volumetric growth, revenue growth is expected to remain healthy over the medium term. Also, expected moderation in raw material prices (especially iron ore and coal) going forward and sustenance of healthy realisations amid healthy demand scenario shall support operating profitability.

 

• Healthy operating efficiency driven by integrated operations and prudent working capital management: Operations of the group are well integrated in the form of backward and forward integrated operations (from LAM coke, blast furnace manufacturing facilities to the presence of captive power for manufacturing of end products i.e. DI pipes, DI fittings and CI pipes. As such, integrated nature of operations and extensive experience of more than five decades of the promoters in the industry continue to support healthy profitability. Apart from the benefits derived from the value chain, the group is supported by its presence in railway siding and captive power plant segments. Furthermore, its flexibility in terms of customer base, captive consumption, and outside sale requirements; helps maximise realisations and profitability. Consolidated EBITDA margins for the group stood over 16% in fiscal 2024 and first six months of fiscal 2025 marked by increased operational efficiency through benefits derived from integrated operations, moderation in raw material costs (i.e coking coal and iron ore), sustenance of healthy realisations of finished products amid healthy demand scenario and healthy capacity utilisation thereby leading to increased economies of scale. Healthy capacity utilisation levels across different product lines despite continuous addition to capacities on the back of healthy demand scenario and volumetric growth shall also support operating efficiencies resulting in steady profitability and Return on Capital Employed (RoCE) for the group. Profitability will be supported by improving capacity utilisation thereby supporting healthy volumetric growth amid robust demand scenario fetching healthy realisations and consequently supporting healthy profitability amid demand supply mismatch situation additionally supported by moderated input prices. Moreover, bulk procurement of raw material such as iron ore and coal and close proximity to raw material sources help in cost saving. Furthermore, the group purchases raw material back-to-back and maintains order-backed inventory, which mitigates price fluctuation risk of the key inputs such as coking coal and iron ore. As such, operating margin is expected to remain healthy around 17% over the medium term with further moderation in raw material prices observed in Q2 of FY2025, benefit to be realised in the second half of fiscal 2025. Extensive experience of promoters and their close monitoring of the working capital cycle has ensured prudent working capital management over the years, limiting dependence on external debt for working capital. The strong accrual generation ability and prudent working capital management should also result in positive cash-flow from operations for the group going forward. Crisil Ratings expects operating margin to remain healthy over the medium term with blended EBITDA per tonne of over Rs 15,000.

 

• Robust financial risk profile: The financial risk profile should continue to remain robust over the medium term supported by steady accretion to reserves. Consolidated networth of the group stands robust at ~Rs 5437 crore as on September 30th, 2024 (stood at ~Rs 5107 crore as on March 31st, 2024) and is expected to increase over the medium term backed by steady accretion to reserves. Capital structure also remains strong marked by negligible gearing and total outside liabilities to tangible networth (TOL/TNW) expected around 0.30-0.40 time and 0.70-0.80 time respectively going forward, thereby enhancing financial flexibility. Amid steady accretion to reserve on the back of improved profitability, the group has significantly reduced its dependency on external working capital and term debt borrowings, which has consequently improved the capital structure with net debt/EBITDA expected below unity over the medium term. In the absence of large planned debt-funded capital expenditure (capex), steady cash generation is expected to further strengthen financial flexibility.  Consolidated capex of ~Rs 500-800 crore over fiscals 2025-27 is to be funded largely through annual cash accrual expected over Rs 800 crore per fiscal, the same should continue to support healthy debt protection metrics and strong capital structure. Debt protection metrics continue to be strong, with interest coverage and net cash accrual to adjusted debt (NCA/AD) ratios at healthy levels in FY2024 and H1FY2025 and expected to remain healthy going forward supported by healthy profitability generation. However, any major debt-funded capex along with an unexpected large rise in working capital requirement will remain a key monitorable.

 

Weaknesses:

• Vulnerability to volatility in the prices of raw material and finished goods: In addition to demand risk from end-user industry, the industry remain exposed to volatility in raw material prices (such as iron ore and coal) and finished product realisations, which can impact operating margin. The prices are largely subject to global commodity prices. However, this is partially offset by the integrated nature of operations and strong ability to pass through any change in raw material prices to customers on the back of the group’s leadership position in the DI pipe industry. To maintain market share, industry participants have to routinely carry out capacity expansion and debottlenecking activities.

 

Any significant reduction in demand and prices adversely impacting operating margin and cash accruals of the group will remain a key monitorable.

 

• Susceptibility of operating performance to cyclical demand in end-user industries and tender-based business: The demand for company’s manufactured products and sustenance of operating performance is mainly linked to the capex programmes of end-user industries such as water supply, sanitation, irrigation and housing which account for about 80% of the industry’s total demand hereby exposing the company to the budgetary investment plans in these segments especially during an economic slowdown when the governmental organisations may defer capex. ECL undertakes manufacturing of DI pipes, DI fittings and CI pipes and bags some of its orders by submitting bids for tenders floated by government entities. Hence, revenue and profitability depend on supply of manufactured products to large EPC players and non-renewal/receipt of contracts could affect revenue. Furthermore, the group also derives about 15% of its total revenue from exports. Any delay or deferment of capex in end-user industries in the domestic as well as export market could constrain scalability. Growth in revenue also depends largely on the company's ability to successfully get orders and remains susceptible to intense competition from several local players. Sustenance of healthy order book and timely order execution while sustaining profitability shall remain a key monitorable.

Liquidity: Strong

Bank limit utilization of fund-based limits was around 39% during the past twelve months through November 2024. Expected annual cash accrual of over Rs 850-1000 crore per annum will be more than sufficient to meet yearly term debt repayment obligation of around Rs 130-200 crore per annum, over the medium term; the remaining accrual will cushion liquidity. In addition, it shall enhance financial flexibility to cushion any exigencies, incremental working capital requirement or capex plans of the group.  Healthy unencumbered liquidity in the form of cash and bank balance, fixed deposits and investments of around Rs 245 crore as on September, 2024 further support liquidity. Low gearing and strong networth support financial flexibility and provide the necessary financial cushion in case of any adverse conditions or downturn in the business. 

Outlook: Stable

Electrosteel group will continue to benefit from its established market position marked by its leadership position in the DI pipe industry, robust demand leading to a healthy order book and integrated nature of operations, thereby ensuring healthy cash generation. The financial risk profile is likely to remain healthy, driven by conservative capital structure with future capex plans funded by internal cash generation and strong liquidity.

Rating sensitivity factors

Upward factors

• Timely completion of ongoing capex without material cost overrun, ramping up of newer capacities supporting healthy volume growth resulting in consolidated earnings before interest, taxes, depreciation, and amortisation (EBITDA) per tonne around Rs 15,000 on a steady basis
• Phased capex, prudently funded, leading to sustenance of strong debt metrics in line with expectation, with consolidated net debt to EBITDA below 1 time on sustained basis, along with healthy liquidity

 

Downward factors

• Deterioration in operating performance due to weakened demand and intense competition, leading to significant weakening of operating efficiency marked by fall in operating margin below 10% thereby reducing cash accruals
• Larger-than-expected capex or acquisition or stretch in working capital cycle resulting in material increase in leverage (net debt/EBITDA) and thereby weakening of financial and liquidity risk profile, on a sustained basis

About the Company

The company was incorporated in November 1955, as Dalmia Iron & Steel Ltd and re-incorporated under the name of ECL in May 1965.  ECL manufactures ductile iron (DI) pipes with combined installed capacity of 8,00,000 metric tonne per annum (MTPA). Combined production capacity for DI fittings and cast iron (CI) pipes is 21,000 MTPA and 90,000 MTPA, respectively. Through backward integration, the company also operates a blast furnace, coke oven and waste heat recovery-based power plant and manufactures pig Iron, metallurgical Coke, sponge iron, sinter, cement and ferro products. Plants are in Khardah and Haldia in West Bengal, Elavur in Tamil Nadu, and Srikalahasthi in Andhra Pradesh.

Key Financial Indicators (Consolidated)*

As on / for the period ended March 31		2024	2023
Operating income	Rs crore	7487.37	7298.84
Reported profit after tax	Rs crore	739.90	315.98
PAT margin	%	9.88	4.33
Adjusted debt/Adjusted networth	Times	0.36	0.45
Interest coverage	Times	5.80	2.79

*Crisil Ratings’ adjusted financials

Any other information: Not Applicable