Our Dear Shareholders
I am sharing with you our Annual Report for the year ended March 2019 with deephumility and great pride. In the last few years Welspun Corp has transformed into a muchstronger and better organization and this journey continues. Last year I had mentionedthat FY2018 was a year of inflection for Welspun Corp. FY2019 has strengthened my beliefthat we are on the right path and over the next few years we could create significantvalue for our stakeholders.
Year in Review
I would like to begin by sharing with you some key updates on our operationalperformance. FY2019 was a year in which we created some enviable records. Pipe Sales forthe year stood at 1.28 million tonnes the highest annual sales tonnage achieved by theCompany in its history. We also booked orders of around 1.3 million tonnes thus ensuringthat our book remained at record levels close to 1.7 million tonnes in spiteof the record execution. Our Operational EBITDA was close to र 9 bn almost a 50%jump over the FY2018 levels. The US business was our star performer with capacityutilization at close to 80% and EBITDA/ton at close to USD 200/ton. India was also stablewith good mix of domestic oil & gas water and export orders. In Saudi Arabia wewitnessed a turnaround in our operations with the order mix also changing in our favourleading to profitable progress; we reduced losses quarter-on-quarter and turned EBITDApositive by the year end. Operationally this was indeed a most satisfying year.
During the year we also took a strategic decision to divest our Plate and Coil MillDivision (PCMD) and the 43 MW Power Division. We had identified these non-core assets andin order to focus on our core pipes business we have entered into agreements to divestthese. Our aim is to move to an asset-light model and we believe this deal onceconcluded will pave the way for that. We will also see an improvement in profitabilityratios and return ratios as these assets were not being utilized fully leading to a dragon the return on capital employed. Further the transaction will strengthen the balancesheet by providing significant liquidity to the Company and deleveraging the balancesheet.
This deal notwithstanding we have been successful in reducing the net debt in FY2019.We have also pre-paid debt wherever possible in the last few years and we continue to dothat. We have pre-paid USD 50 million worth of loans in March & April 2019 in our USsubsidiary.
The year though was not without challenges. Exchange rate of the Indian rupee wasvery volatile against the US Dollar. However we have a well-defined forex hedging policywhich kept us in good stead through these swings. The second half of the year also sawwhat many describe financial as India's Lehman moment. Default on loans by a majorinfrastructure financing company caused a ripple effect across the economy resulting ina virtual standstill in the credit market. This eventually resulted in many NBFCs andother highly leveraged companies struggling to repay their debt as well. As part of ourtreasury investments we had invested in some of these companies which were rated veryhighly by credit rating agencies but have since defaulted or been significantlydowngraded. We have been completely transparent with our stakeholders about our exposureand have provided full-impairment of any investments on which we had concerns. We havealso taken steps to tighten our treasury management and risk management considering thesafety liquidity and risk of the investments so that such events do not occur in thefuture. This also accelerates our efforts to pre-pay debt in order to reduce the cash andcash equivalents.
I am very excited about the future prospects of the pipes business. We are geared upfor strong growth in all the three geographies in tandem with improved performance drivenby robust order books and strong execution capabilities. Local manufacturing capabilitiesproven execution track record and excellent relationships with large customers and steelsuppliers will accelerate our journey. We see continued strong market in the US driven byOil and Gas projects; and we expect both Oil and Gas as well as Water segments to remainstrong in both Saudi Arabia as well as India.
United States is our most important market today. With rising fracking in the Permianbasin US oil & gas production is booming. US is now the largest oil as well asnatural gas producer in the world and they need pipelines to evacuate this production. Infact pipeline constraint is one of the key reasons which is preventing the US fromfurther increasing its production. With crude prices being in the profitable range thereis a push to drill more and eventually to evacuate more. In addition to this there arealso restrictions on import of steel pipes into the US in the form of tariffs and quotas.This has helped the local US plants to command better volumes and higher margins. We haveone of the finest and largest pipe plants in the US with an excellent track record andaccreditation by all major clients.
In Saudi Arabia we see strong demand in both oil & gas as well as water sectorsdriven by large projects from Saudi Aramco and SWCC respectively. In the medium term wesee big potential from the recent find of shale gas in Arabia as well as the intent toconnect the entire GCC and Middle East nations through a pipeline network. Our Saudi JVhas close to two years of visibility in terms of order book. The strong order book givesus the capability to be selective in picking up orders with better margins. We have alsostreamlined capacities by de-bottlenecking. With the better order mix and higher capacityutilization we expect to have a significant improvement in our profitability ingeography.
We are also optimistic about the scenario in India with strong demand for both oil& gas as well as water pipelines. On the O&G side demand is driven by variouspipeline projects being undertaken by Oil Marketing Companies development of a nationalgas grid by GAIL and last-mile connectivity picking up speed in City Gas Distribution(CGD) projects. Also there is resurgence in the water infrastructure segment. Waterirrigation pipelines by various state governments such as Madhya Pradesh Karnataka andAndhra Pradesh continue to provide a robust demand situation. We foresee huge businesspotential in and around Madhya Pradesh. Hence your company has also re-located some ofits spiral capacity to Bhopal to benefit from the large business opportunities in theState. We are also anticipating massive opportunities in the National River Linkingproject aiming at inter-basin water transfer.
WCL is also well-placed to service export demand for LSAW pipes from its Indian plants.We see strong demand from the Middle East South East Asia Australia and East Africa. WCLplants have global approvals and accreditations and an impeccable track record ofsupplying pipes for complex projects for Oil & Gas across the globe. This makes us oneof the top suppliers of choice for any LSAW requirement.
Coming to our prospects for FY2020 we have an all-time high starting order book ofaround 1.7 million tonnes which gives us very strong visibility. Profitability associatedwith current order book is significantly higher than the recent profitability trends andwe expect this to continue at least for the medium term. With value unlocking from thedivestment from non-core assets like PCMD & 43 MW power plant the focus now remainson the relatively asset-light pipe business. We have adequate capacities across the globeand we do not foresee any significant capex. We have also worked on optimising our workingcapital. Therefore the focus will be on free cash flow generation and furtherstrengthening of balance sheet through debt reduction. We are on track to achieve a statusof being zero net debt by the end of FY2020.
Our focus will also be to utilise the Company's surplus cash reserves in order toenhance shareholder value. We have recently announced plans for buyback of shares whichwill further make the balance sheet leaner. We look forward to reward our shareholdersregularly whether it is through dividends or buybacks.
My sincere thanks
I want to congratulate and thank the management team and all our dedicated employeeswho have worked tirelessly to create a stronger organization.
I also take this opportunity to express my heartfelt gratitude to our Board ofDirectors Customers Suppliers Bankers and Investors. This strong position is possibleonly because of your continued support. I am confident talented people with exceptionalexpertise and a passion to envision and build a bright future will give me a chance totalk about an even brighter FY2020 when I pen down my views next year.
Thank you for your support and your confidence in Welspun Corp.