Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Man Industries India Limited (MIIL) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Positive/CRISIL A2+’.

 

The upgrade reflects CRISIL Ratings’ expectation that the MIIL’s credit risk profile will improve owing to sustenance of strong financial performance over the medium term supported by healthy orders in hand, improved liquidity and favorable industry scenario for submersible arc welded (SAW) pipes in the domestic and export markets.

 

As expected, fiscal 2021 financial performance was marked by a revenue growth of 18% to Rs 2,089 crore compared to Rs 1,769 crore in fiscal 2020 despite the challenges posed by the ongoing Covid-19 pandemic. The earnings before interest tax depreciation and amortisation (EBITDA) margin also increased by 100 basis points to 11% in fiscal 2021. Debt protection metrics have also strengthened as expected with an interest coverage ratio of 4.5 times in fiscal 2021 from 2.9 times in fiscal 2020. Credit ratios are expected to improve further and interest coverage ratio is expected to remain above 4 times over the medium term and, thus, would be a key rating sensitive factor.

 

Presently, the company has an outstanding order book of Rs 1500 crore and a similar amount of orders in bid pipeline, thereby providing healthy revenue visibility for fiscal 2022. Business performance for fiscal 2022 should remain strong, driven by healthy order flow and good demand prospects from end-user industries such as oil & gas and water supply & sanitation.

 

The company is setting up a new electric resistance welded (ERW) pipes manufacturing facility in Anjar, Gujarat, with capacity of 125,000 MT which is expected to be commissioned in the first quarter of fiscal 2023. This will widen the company’s product offerings and enhance its market position over the medium term. Additionally, the company is undertaking a modernisation/upgradation capital expenditure (capex) in its existing facilities.

 

The overall capital outlay planned for the above-mentioned projects is around Rs 250 crore. Of this, the company is planning to raise Rs 165 crore of debt, which has already been sanctioned. The remaining will be funded by the internal cash accrual. MIIL also expects to divest stake in its wholly owned subsidiary, Merino Shelters Pvt Ltd (MSPL), and is also looking to liquidate non-core assets on the balance sheet, which could further support liquidity to fund the capex plans and would be a key monitorable.

 

The ratings continue to reflect the established market position of MIIL in the SAW pipes industry along with healthy financial risk profile. These strengths are partially offset by the working capital intensive nature of operations and the susceptibility of the company to cyclicality in end-user industries along with volatility in raw material prices and foreign exchange (forex) rates.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has consolidated MIIL and its wholly owned subsidiaries -- Man USA INC, and Man Overseas Metal DMCC -- as there are financial fungibilities between the companies. The entities are collectively referred to as the Man group. The subsidiaries are strategic to MIIL in view of their strong integration with its operations.

 

CRISIL Ratings has not consolidated MSPL, given that MIIL has not provided any financial support (equity investment or loan) to it since fiscal 2017 in line with the management’s articulation and corporate guarantee of MIIL for facilities of MSPL had ceased to exist. CRISIL Ratings has written-off the investments in MSPL from MIIL’s networth to calculate its adjusted networth.

 

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 position in SAW pipes industry

The domestic pipes industry is consolidated, with the top four players accounting for 80% of capacity. Limited competition is due to large capital requirement and the necessity to have critical accreditations and customer approvals. MIIL is amongst the largest SAW pipe players in India, and produces both helically submerged arc welded (HSAW) and longitudinal submerged arc welded (LSAW) pipes. It has been manufacturing SAW pipes, branch pipes and coatings since 1995. 

 

• Healthy financial risk profile

The financial risk profile is expected to remain healthy with sizeable adjusted networth of Rs 733 crore and gearing of 0.39 time as on March 31, 2021. Interest coverage ratio improved to 4.5 times in fiscal 2021 from 2.9 times in fiscal 2020. Liquidity is expected to remain healthy at standalone level, as cash accrual – projected at more than Rs 130 crore per annum over the medium term – should comfortably meet the yearly debt obligation. The company’s ability to manage the incremental working capital requirement while maintaining comfortable gearing remains crucial, given the moderate-to-high utilisation of the fund-based limit.

 

Weaknesses:

• Susceptibility to cyclicality in end-user industries and to volatility in raw material prices and forex rates

The Man group has historically derived over 85% of the revenue from the oil and gas segment and the remaining from the water and irrigation segment. Slowdown in the oil and gas industry because of a significant decline in crude price impacted operations in the past. Strong demand from new projects in the oil and gas segment in key markets of India and the Middle East is critical for 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 local supply and trade duties. Consequently, the group’s order inflow and operating performance are highly linked to the demand prospects from these sectors. Moreover, there is a 2-4 month lead time between application for, and the final award of, a tender. Because these contracts are of a fixed-priced nature, the Man group cannot pass on increase in input costs to customers after applying for the tender.

 

• Working capital intensive operations

Gross current assets have been around 200 days in the past, driven by debtors of over 100 days. Over the medium term, the working capital requirement is expected to rise with increase in the order book. Also, concentration in receivables renders MIIL susceptible to steady increase in the working capital requirement, and hence remains a key monitorable. 

Liquidity: Adequate

Cash accrual is projected at more than Rs 130 crore per annum in fiscals 2022 and 2023, sufficient to meet the yearly debt obligation of around Rs 5 crore in fiscal 2022 and Rs 17 crore in fiscal 2023; the surplus cash will aid financial flexibility. The fund-based limit of Rs 127.5 crore was utilised at an average of 50% during the six months through April 2021; the company also avails of need-based project-specific limits. Cash and cash equivalents was Rs 103 crore as on March 31, 2021. CRISIL Ratings expects internal accrual, cash & cash equivalents and unutilized bank lines to be sufficient to meet repayment obligation as well as incremental capex requirements.

Outlook: Stable

CRISIL Ratings believes that group's credit profile will sustain over the medium-term driven by healthy order book position and strong debt protection metrics.

Rating Sensitivity factors

Upward factors

• Improved operating performance, leading to interest coverage ratio sustaining above 5 times.
• Business risk profile improves with significant growth in outstanding order book along with diversification of product profile
• Considerable improvement in liquidity owing to realisation of non-current assets/non-core investments

 

Downward factors

• Weak operating performance, resulting in the interest coverage ratio less than 3.5 times on sustained basis.
• Business risk profile weakens, with substantial reduction in outstanding order book
• Deterioration in financial risk profile due to higher-than-expected debt-funded capex or any support provided to non-business-related entities

About the Company

MIIL is one of the largest SAW pipe players in India with combined capacity of 10 lakh tonne per annum, distributed equally between HSAW and LSAW. Incorporated in 1988, it commenced operations with the production of aluminum extrusion products. In 1995, it diversified into manufacturing SAW pipes. In March 2008, MIIL bought 55% stake in Man Infraprojects Pvt Ltd (Man Infraprojects), which undertook real estate development, and increased stake to 100% after acquiring the promoter shareholding in September 2011. In September 2013, MIIL announced a restructuring of its businesses. As a part of the arrangement, with effect from April 1, 2014, Man Infraprojects was hived off from MIIL.

Key Financial Indicators (Consolidated; adjusted by CRISIL Ratings)

As on/for the period ended March 31		2021	2020
Revenue	Rs crore	2089	1769
Profit after tax (PAT)	Rs crore	98	56
PAT margins	%	4.7	3.1
Adjusted debt/adjusted networth	Times	0.39	0.43
Interest coverage	Times	4.47	2.86

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	125.00	NA	CRISIL A/Stable
NA	Letter of credit & Bank Guarantee**	NA	NA	NA	1157.00	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	34.00	NA	CRISIL A/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	699.00	NA	CRISIL A1
NA	Term Loan	NA	NA	Mar-28	165.00	NA	CRISIL A/Stable

*Interchangeable with other fund-based and non-fund-based facilities

**Includes sub-limits for buyer's credit

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Man USA INC, and Man Overseas Metal DMCC	Full consolidation	Strong integration with MIIL’s operations and financial fungibility