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ACRA assigns BBB+(RU) to JSC "Zagorsk Pipe Plant", outlook Stable

The credit rating assigned to JSC "Zagorsk Pipe Plant" (hereinafter, ZTZ, or the Company) is due to its strong market position, medium business profile, medium level of corporate governance, low debt load, and high interest coverage. The credit rating is under pressure from medium profitability and size, as well as moderate cash flow and liquidity.

ZTZ is the leader in the Russian market in terms of shipments of large-diameter pipes (LDP) and their total production as of 2018. The Company’s main activity is production of electric-welded LDPs for oil and gas pipelines. The Company also produces polyurethane foam insulation pipes. In 2018, the Company’s revenue under RAS exceeded RUB 39 bln, while production of basic goods (LDPs) rose by 309% compared to the previous year (507,600 tons in 2018 vs. 124,000 tons in 2017). ZTZ is the key asset of the Company, there are no other large production assets. The Company has a staff of 1,679 employees. The controlling stake (74.99%) is owned by Steel Pipe East Limited (an offshore company), which ultimate beneficiary is D. G. Safin, Director General of the Company.

Key rating assessment factors

The medium business profile assessment is due to a low degree of vertical integration and low product diversification: the LDP segment accounts for nearly 96% of the Company's revenue. The industry’s market is characterized by low cyclicality: its estimated capacity stood at 2–2.5 million tons (the Russian market) in the last three years, however, the market is quite saturated due to excess production capacity. The market is characterized by strong concentration (the combined share of the five largest companies in total production of LDPs was 97% in 2018). Considering the specifics of the Company’s business, ACRA gives a rather high assessment of the factor responsible for the share of products with high added value. The low assessment of geographical diversification is due to a low share of export contracts in the Company’s revenue structure and low diversification of production assets. In the coming years, ZTZ plans to supply products for the implementation of such key projects of PJSC Gazprom (hereinafter, Gazprom; ACRA rating — AAA(RU), outlook Stable) as the Power of Siberia and Power of Siberia-2 pipelines, and the South Stream pipeline. ZTZ also plans to proactively boost exports (from 307 tons in 2018 to 30,000 tons in 2019).

The medium level of corporate governance is due to the transparent business structure and successful implementation of the Company’s aggressive growth strategy. The construction of ZTZ started in 2014. In 2016, the first commercial batch of pipes was shipped; in 2018, ZTZ reached a 100 percent capacity utilization rate and gained a leading position in the market. The Company plans to raise its output by another 43% in 2019 (up to 724,000 tons compared with 507,600 tons in 2018), reaching a sustainable production volume of 700,000 tons by 2020.

The Company’s top management is made up of professionals with extensive expertise in the industry. ZTZ applies certain elements of the risk management system (in certain cases, exchange rate risk hedging), but no unified documents on the strategy and risk management have been approved yet. The financial transparency is low, and the business structure is simplified as much as possible: ZTZ is the core operational asset and owner of the property.

Low debt load and high coverage of fixed charges. The Agency positively assesses the Company’s financial policy aimed at maintaining an adequate level of debt load and providing for the complete absence of dividend payments. Based on financial indicators forecasted by ACRA, the Company’s weighted average debt load will be 1.7x for the period between 2017 and 2022 due to the growth of FFO before net interest payments in the forecast period and the announced repayment of the bulk of the debt in 2019 and 2020.

The medium level of liquidity. The Company has a sufficient volume of open credit lines and cash balances on its accounts, but the presence of peak repayments in the short-term has a negative impact on the assessment. The qualitative assessment of liquidity is due to the use of mainly internal sources of the Company, a small degree of lending banks’ diversification and an uneven repayment period.

Medium business profitability and moderate cash flow. According to ACRA, given the expected decline in prices for flat products in Russia and the contracts on the supply of pipe products, signed by ZTZ with the key consumer, the Company’s weighted average FFO margin before interest and taxes will amount to 10.3% for the period between 2017 and 2022. The medium level of profitability determines moderate cash flows of the Company. The bulk of capital expenditures (more than 99%) goes to expand activities (capital construction, acquisition of fixed assets and intangible assets). The ratio of capital expenditures to revenue will be 2.3%.

Key assumptions

  • Sales of products at prices based on the Company’s data under the existing contracts. The volumes of sales are in line with the plans provided by ZTZ;
  • Higher expenses of the Company based on contract prices for raw materials and ACRA’s inflation expectations;
  • ZTZ will remain one of the key suppliers of LDPs for Gazprom;
  • No dividend payments.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Growth of the FFO margin before interest and taxes above 15%;
  • Lower debt load (total debt to FFO before net interest payments below 1х);
  • Growth of the weighted average FCF margin above 2%.

A negative rating action may be prompted by:

  • Significant increase in the weighted average debt load above 3.5x;
  • Deterioration of the weighted average debt service ratio below 2.5x;
  • Significant decrease in the Company’s market share;
  • Reduction in the average ratio of FFO before interest and taxes below RUB 5 bln;
  • Significant deterioration in access to external and internal sources of liquidity.

Rating components

SCA: bbb+.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating has been assigned to JSC "Zagorsk Pipe Plant" for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating is assigned based on the data provided by JSC "Zagorsk Pipe Plant", information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and JSC "Zagorsk Pipe Plant" participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by JSC "Zagorsk Pipe Plant" in its financial statements have been discovered.

ACRA provided no additional services to JSC "Zagorsk Pipe Plant". No conflicts of interest were discovered in the course of credit rating assignment.

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