Steady profitability, comfortable balance sheets to keep credit profiles stable
Revenue of electric resistance welded (ERW) steel pipes manufacturers will grow 10-12% this fiscal, owing to strong demand from the infrastructure, real estate, irrigation, and water supply and sanitation (WSS) sectors. The industry had logged 16-18% growth last fiscal, driven by pent-up demand.
Rising capacity utilisation, steady profitability and healthy balance sheets will keep credit profiles stable this fiscal, a CRISIL Ratings analysis of five players, accounting for more than half of the ERW pipe industry’s volume, shows. ERW is the largest segment of the steel pipes industry, accounting for ~70% of volume. The other segments —submerged arc welded pipes and seamless pipes — constitute the remaining. ERW pipes have predominantly been used for fluid transportation applications. But over the last few years, they are increasingly finding applications in theconstruction and infrastructure segments.
Says Anand Kulkarni, Director, CRISIL Ratings, “Increasing use of structural steel pipes in public infrastructure (railways, airports, metro), high-rise buildings and warehouses is pushing up demand for ERW pipes. A ~33% increase in budgetary allocation for infrastructure projects this fiscal will also provide leg-up.
Large government investment in water infrastructure projects such as the Jal Jeevan mission and Har Ghar Nal Yojana will keep demand from the WSS and irrigation sectors steady.”
Volume is expected to grow 12-15% this fiscal, backed by increased affordability with softened steel prices. Last fiscal, it had surged 25-28%, supported by a plunge in steel prices and pent-up demand.
The ERW segment has seen modest operating margin due to limited value addition, low entry barriers, and consequently, high competitive intensity. The segment has numerous unorganised companies, which have captured 30-40% of the market.
The organised manufacturers are increasing capacity for value-added products such as pre-galvanised, galvanised, coated and API-grade pipes to improve their product mix. This has led to steady improvement in their operating profitability over the past few years. The profitability of the CRISIL Ratings sample set is estimated at 6-6.5% this fiscal.
Says Rucha Narkar, Associate Director, CRISIL Ratings, “The ERW pipe capacity in India rose ~20% last fiscal and is not expected to increase materially this fiscal as focus will be on improving utilisation. Despite the capacity addition, utilisation is seen healthy at ~70% and improve gradually thereafter on strong demand.
Notwithstanding the capital expenditure (capex), credit profiles should remain stable, backed by higher profitability — through increased share of value-added products — and comfortable leverage.”
Healthy revenue growth and steady rise in profitability augur well for the capital structure of manufacturers. Their ratio of debt to earnings before interest, taxes, depreciation and amortisation is estimated to improve to ~0.7 time from ~0.9 time last fiscal. Interest coverage is expected above 14 times versus ~12 times last fiscal.
That said, volatile steel prices and a slowdown in demand due to pushback of projects by end-users will bear watching.