India Ratings and Research (Ind-Ra) believes that the proposed demerger scheme of Welspun Steel (WSL) manufacturing business along with its investments in various group entities including Welspun Specialty Solutions (WSSL) into Welspun Corp (WCL) could be credit positive for the ratings of WSSL. Upon completion of the said scheme, WSSL’s parent company would be WCL (currently WSL). The proposed scheme is subject to regulatory and government approvals including stock exchanges and National Company Law Tribunal. The agency will continue to monitor the progress of this transaction and assess the linkages between WSSL and WCL to evaluate the resultant impact on the credit ratings of WSSL. Ind-Ra rates WSSL at 'IND BBB-'/Negative.
Proposed arrangement: WCL proposes to acquire the division of the WSL's steel operating business which manufactures BIS-certified steel billets and direct reduced iron, specialty steel and thermo mechanical treatment bars and businesses directly or indirectly carried out through the investments held in WSSL, Anjar TMT Steel Private Limited and Welspun Captive Power Generation. WCL's management has articulated that it expects to complete the proposed scheme within FY22.
WSSL to Benefit from Proposed Arrangement: Ind-Ra expects the aforementioned arrangement to bring in synergistic benefits to WCL, WSSL and other group entities involved, resulting from operational rationalisation (including reduction in overheads, administrative, managerial and other expenditure), leading to improved operational efficiency. Furthermore, the management has articulated that the consolidation and simplification of the group structure will provide a stronger base for potential growth, both organically and inorganically through expansion and acquisition opportunities.
The proposed arrangement is likely to provide WSSL a stronger presence across market segments, access to new markets and product offerings while having access to WCL's marketing capabilities. This could translate into better earnings predictability and improved operational cash flows.
Non-cash Consideration: The transaction is a related-party transaction and the same is being done on an arm’s length basis post thorough due diligence as per WCL’s press release. Since the majority stakeholders in WSL are the same as WCL, the indirect acquisition of control of WSSL is exempt from open offer provisions under the Securities and Exchange Board of India (Substantial acquisition of Shares and Takeovers) Regulations, 2011. The purchase consideration for WSL’s steel operating business including its investments held in WSSL, Anjar TMT Steel and Welspun Captive Power Generation will be paid in the form of cumulative redeemable preference shares (CRPS) amounting to Rs 3,627.3 million. The CRPS would not be listed on the stock exchanges and will be redeemable at the option of the holder, upon the expiry of 18 months from the date of issue.
From WSSL’s standpoint, the share capital held by WSL (50.03% as of 31 March 2021) will now be held by WCL upon completion of the aforesaid scheme resulting in a new parent entity.
WCL - Flagship entity within the Welspun Group: WCL's diverse product profile includes helical submerged arc welded line pipes (1480,000MTPA), longitudinal submerged arc welded line pipes (700,000MTPA), electric resistance welded/high frequency induction welding line pipes (375,000MTPA), ductile iron pipes (400,000MTPA), plates & coils, coating systems and other ancillary services. Its manufacturing facilities are spread across India, USA and Saudi Arabia. In FY21, WCL recorded pipe sales of 1,003,000MT, resulting in income from operations of Rs 64,40 billion (FY20: Rs 99.57 billion). As per its press release, WCL had a net cash position of Rs 6.20 billion as of 31 March 2021.
WSSL - Weak performance in FY21; Likely to Recover in FY22-FY23: WSSL operates an electric arc furnace (for alloy steel) and induction furnace (for stainless steel) based steel melting shop, a rolling mill and a seamless pipe facility in Bharuch, Gujarat. It has a capacity of 150,000 million tonnes per annum (MTPA) in steel melting shop; 100,000MTPA in rolling mill along with 10,000MTPA in pipes division. In FY21, WSSL earned a revenue of INR934 million (FY20: Rs 2,952 million) and negative EBITDA of Rs 204 million (negative INR710 million). The weak performance of WSSL can be attributed to COVID-19 disruptions and delays in obtaining approvals which has delayed the ramp-up within the stainless-steel division. As a result, WSSL's liquidity position has stretched and its credit metrics have deteriorated, although Ind-Ra expects a recovery over FY22-FY23.
However, despite the weak performance, the ratings of WSSL have been driven by the credit assessment of WSSL’s promoter WSL, in view of the moderate legal linkages and strong strategic and operational linkages between them. Furthermore, the agency has relied on continued support from the Welspun Group/WSL to meet the scheduled debt repayments and interest payments, in case of shortfall. WSL’s management has expressed its willingness to support all present and future borrowings of WSSL in the form of corporate guarantees. Also, the group companies have given collateral margin in the form of fixed deposits for the timely repayment of term debt obligations and a reduction of the interest burden on WSSL.
