Rating Rationale

Key rating drivers & detailed description

Strengths:

Established position in the pipes industry with significant backward integration: The three-decade-long experience of the promoters in the ductile iron (DI) pipes industry has helped them establish significant market presence, expand production capacities, and undertake backward integration over the years. The facility is already utilised by over 90% and ECL plans to further add capacity of more than 2.5 lakh metric tonne per annum (MTPA) over the next two fiscals. This will enable the company to retain its leadership position in the DI pipe market. 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.

Healthy financial risk profile: Networth and gearing have improved to Rs 5,111 crore and 0.44 time, respectively, as on March 31, 2024 (Rs 4,376 crore and 0.6 time, respectively, a year earlier), backed by better profitability and hence, steady accretion to reserves. Lower dependence on external debt and better working capital management should also aid the financial risk profile. Debt protection metrics remain comfortable with interest coverage and net cash accrual to adjusted debt ratios at 5.7 times and 0.34 time, respectively, in fiscal 2024.

Weaknesses:

Low pricing power and exposure to fluctuations in input prices and low pricing power: Prices of key inputs - iron ore and imported coking coal - have been volatile in the past. Realisations on the end-product also tend to fluctuate, basis the demand scenario. With fixed-price contracts accounting for 90-95% of total sales, the company remains exposed to volatility in raw material prices. This could adversely impact profitability and thereby limit cash flow. Operating margin has remained in the range of 10.7% to 16% during the four fiscals ended March 31, 2024.

Working capital-intensive operations: Gross current assets (GCAs) were over 163 days as on March 31, 2024. The group derives revenue from domestic as well as overseas customers. It offers domestic customers a credit period of 60-75 days and maintains inventory of 80-90 days. Out of the raw materials, the group procures iron ore from the domestic market and imports coking coal from Australia, Russia and Indonesia. Working capital cycle may remain steady over the medium term.