Rationale

 To arrive at the ratings, ICRA has taken a consolidated view of the business and financial risk profiles of APL Apollo Tubes Limited (AATL), its wholly-owned subsidiaries, namely Shri Lakshmi Metal Udyog Limited (SLMUL) and Apollo Metalex Private Limited (AMPL), and its step-down subsidiary, Apollo Tricoat Tubes Limited (ATTL). Collectively referred to as the group/APL/company, these companies are in similar lines of businesses and have significant operational and financial linkages. The rating upgrade factors in the continued improvement in the group's financial risk profile, led by sustained healthy operating performance, improved working capital management and ongoing de-leveraging of its balance sheet. ICRA expects the trend in improvement to continue over the medium term, with the revised rating more closely reflecting an updated view on the company's credit profile. The group is set to report a robust double-digit growth along with sustained healthy margins in FY2022 following a 10% growth in operating income and a ~180-basis-points (bps) improvement in operating margins in FY2021 amid the pandemic-led disruptions. The growth will be spurred by a surge in realisations, continued volumetric rampup and increasing proportion of value-added products. Further, the commissioning of the Raipur facility by the end of FY2022 with focus on higher value-added products is expected to support growth and margins over the medium term. The group also expects to conclude the merger of SLMUL and ATTL with AATL by the end of the current fiscal, which would simplify the group structure and provide operational synergies. Moreover, the group has considerably reduced its gross working capital cycle over the past two fiscals on the back of an efficient working capital management, which has supported its cash flow generation. This in turn helped the company prepay part of its debt obligations, facilitating faster deleveraging of its balance sheet. Together with healthy return metrics, this translates into robust debt coverage metrics for the group. The ratings continue to reflect the group's leadership position in the domestic electric resistance welded (ERW) pipes segment and its geographically-diversified manufacturing base across India. The ratings, however, are constrained by the intense competition in the pipes and tubes industry due to the presence of both organised and unorganised players. This moderates the group's pricing power, making it more vulnerable to the volatility in steel prices.