OREANDA-NEWS. Fitch Ratings has assigned PT Steel Pipe Industry of Indonesia Tbk (Spindo) a National Long-Term Rating of 'A-(idn)'. The Outlook is Stable.

Spindo's rating reflects its solid market position in the Indonesian steel sector, diversified revenue drivers, and stable conversion margin. The rating is constrained by a large capex schedule that will pressure the company's free cash-flow generation and keep leverage moderately high.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS
Solid Market Position: Spindo's rating reflects its market position as the largest steel pipe manufacturer in Indonesia in terms of capacity. Fitch believes that the company will maintain its market leadership as it continues to invest in additional capacity in the next two years. Spindo is the market leader for products such as electric resistance welded (ERW) and spiral submerged arc welded (SSAW) pipes. The company estimates that it has about 30% of the market in 2014 based on its revenue of more than IDR3trn (USD250m).

Stable Conversion Margin: Spindo's conversion margin as measured by EBITDA/ton has improved to IDR1.5m/ton in 2014 from IDR1.3m/ton in 2013. Fitch believes that the company's conversion margin will remain appropriate for its rating at above IDR1.3m/ton in 2015-2017. The agency also expects EBITDA/ton to improve to above IDR1.4m/ton from 2017 as the company increases the proportion of sales from the oil and gas segment.

Diversified Revenue Drivers: Spindo derives its earnings from various industries, such as construction (54%), oil and gas (19%), furniture (14%) and automotive (13%). Fitch believes that such diversification will reduce earnings volatility.

High Capex Constraints: Spindo's rating is constrained by its debt-funded capex, which will keep the company's leverage moderately high and free cash flows negative in 2015-2017. Spindo plans to increase its annual capex to above IDR500bn until 2017 for factory expansion and additional machineries, from capex of IDR301bn in 2014. The company expects to significantly increase its capacity in 2016 and 2017 as its new machines commence operations.

Limited Geographical Diversification: Spindo sells more than 97% of its products domestically at end-2014. This exposes Spindo to downturns in the Indonesian market, which may be vulnerable to an influx of low-cost Chinese steel products. However, we believe that competition with cheaper Chinese products will remain manageable given Spindo's market position and stable conversion margin.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Spindo include:
- Average selling price to remain flat in 2016 and 2017 and increase 0.5% in 2018.
- Dividend pay-out ratio of 30%.
- 20% increase in labour cost per annum.
- Annual capex of IDR500bn-IDR1trn in 2015-2017.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Net debt/EBITDA sustained at below 3.5x (2014: 3.9x)
- Conversion margin sustained above IDR1.5m/ton (2014: IDR1.4m/ton)

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Net debt/EBITDA above 4.5x on a sustained basis
- Conversion margin below IDR1.25m/ton on a sustained basis