Rating Rationale
August 30, 2019 | Mumbai
Birla Corporation Limited
Rating outlook revised to 'Stable'; ratings reaffirmed 
 
Rating Action
Rs.280 Crore Non Convertible Debentures CRISIL AA/Stable (Outlook revised from 'Negative' and rating reaffirmed) 
Rs.300 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Birla Corporation Limited (BCL) to 'Stable' from 'Negative'  while reaffirming the rating at 'CRISIL AA'. The Commercial paper has been reaffirmed at 'CRISIL A1+'.
 
The outlook revision reflects CRISIL's belief that BCL's operating performance will remain healthy over the medium term. During the first quarter of fiscal 2020, BCL recorded healthy earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 385 crore (as against Rs 246 crore for the corresponding quarter of the previous year) driven by improvement in realisations by more than 10%.  Premium products accounted for 37% of total product sales in the first quarter of fiscal 2020, marking a volume increase of 12% yoy as against total volume sale increase of 4%. The company also focussed on increasing its share of blended cement; which increased to 90% from 76% a year ago.
 
Financial risk profile is also expected to significantly improve driven by increase in accruals, Net Debt/EBITDA expected to improve to around 3 times in fiscal 2020 from 3.5 times in fiscal 2019, driven by healthy operating performance. Debt protection metrics expected to steadily improve over the medium term.
 
The ratings continue to reflect the company's established position in the cement industry, synergies from Reliance Cement Company Pvt Ltd (RCCPL) acquisition and high financial flexibility.  These strengths are partially offset by its leveraged capital structure, exposure to funding and execution risks, susceptibility to input costs and cyclicality in the cement industry.

Analytical Approach

To arrive at the ratings, CRISIL has combined the business and financial risk profiles of BCL and RCCPL. RCCPL's acquisition is strategic for BCL, and therefore the latter is expected to extend financial, operational, and management support to RCCPL when required.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established position in the cement industry
BCL has a consolidated capacity of 15.58 MTPA, of which 10 MTPA is in BCL and 5.58 MTPA is in RCCPL. The company has its own captive limestone mines, clinker capacities as well as captive power plant. The company's market position in Central India has strengthened post acquisition of RCCPL.
 
 * Synergies from RCCPL transaction
The operating profitability is expected to benefit from the VAT incentives available to RCCPL and various synergies in logistics, power and fuel and selling and distribution expenses. Post the acquisition, the capacity utilisation of RCCPL has improved from 64% in fiscal 2017 to 89% in fiscal 2019. It has mineral concessions in Madhya Pradesh, Maharashtra, Rajasthan, Karnataka, Andhra Pradesh, and Himachal Pradesh for further expansion. RCCPL's cement plants are relatively new and enjoy various tax incentives. Given BCL's presence in the central region, the acquisition offers sizeable synergies.
 
* Healthy liquidity and financial flexibility
Financial flexibility continues to be comfortable, backed by liquidity, sizeable surplus land parcels, and support available from the MP Birla group. The company has cash and liquid surplus of Rs 739 crores as on March 31, 2019. In addition, BCL continues to enjoy flexibility and support from the promoter group.
 
Weakness
* Moderate debt protection metrics of the company: BCL has acquired RCCPL at a total consideration of Rs 4800 crore (including debt of Rs. 2400 crore). The company has paid total consideration of Rs. 2272 crore towards the transaction, which has been funded by  debt and cash and liquid investment, led to increase in debt and moderate weakening of debt protection metrics.
 
The company's debt funded capex plan to set up a greenfield capacity at Mukutban will keep the leverage levels high. Net Debt/EBITDA will remain in the range of around 3.0 times over the medium term.
 
* Execution risks:  The Company is undergoing a capex to set up 3.9 MTPA of greenfield cement plant in Mukutban, Maharashtra at a total cost of Rs 2,450 crores. The sizeable capex plan exposes the company to execution risks.
 
* Input costs related risk and cyclicality in cement industry
The profitability is susceptible to volatility in input costs, such as material, power, fuel and freight costs in line with the industry. For instance, in fiscal 2018, the operating profits were impacted by issues such as ban on sand mining in Rajasthan, UP, ban on petcoke in Rajasthan and shortage of railway rakes, operating margins in fiscal 2019 were impacted by higher cost pet coke and diesel.

Liquidity: Strong
BCL enjoys strong liquidity driven by expected cash accruals of more than Rs 600 crore per annum in fiscal 2020 and fiscal 2021 and cash and cash equivalents of over Rs 739 crore as on March 31, 2019 as against Rs 400-500 crore of long term debt repayment obligations in fiscal 2020 and fiscal 2021. The working capital facilities of 500 crore were minimally utilised. The company has capex of around Rs 3400 crore over fiscal 2019 to fiscal 2022 expected to be financed through debt of Rs. 2400 crores.. Its bank lines are expected to meet its incremental working capital requirements.
Outlook: Stable

CRISIL believes the company will continue to benefit from high financial flexibility and a healthy business risk profile over the medium term.

Rating Sensitivity Factors
Upward Factor

* Reduction in debt levels, leading to improved consolidated net debt to EBITDA of below 2 times on a sustainable basis
* Substantial improvement in business performance, driven by healthy growth in both the standalone operations as well as post acquisition of RCCPL
* Significant improvement in operating margin.

Downward Factor
* Weaker than expected operating performance, or higher debt resulting from capex or acquisitions, leading to higher consolidated net debt to EBITDA of around 3.3 -3.5 times on a sustainable basis
* Moderation in the business risk profile.
* Significant weakening of financial flexibility.

About the Company

BCL is the flagship company of the MP Birla group. The company was originally incorporated as Birla Jute Manufacturing Company Ltd in 1919, and was renamed in 1998 to reflect its diversified operations. Under the chairmanship of Mr Madhav Prasad Birla (Mr M P Birla), the company diversified into manufacturing cement, polyvinyl chloride (PVC) goods, and automotive trim parts. As on date, cement is the largest contributor to the company's revenue (over 90%) with the remaining coming from jute and other products. BCL has seven cement plants across four states: Rajasthan, Uttar Pradesh, Madhya Pradesh, and West Bengal.

After Mr M P Birla passed away, the group was being run by his wife, Ms Priyamvada Birla, who passed away in 2004. Ms Birla had appointed Mr R S Lodha and his son Mr Harsh V Lodha as her successors through a will. Currently, the ownership is being contested by members of the Birla family against Mr Harsh V Lodha, the current chairman, in the court of law.

On August 22, 2016, BCL has acquired Reliance Infrastructure's (R-infra) entire equity in RCCPL, a wholly owned subsidiary of R-Infra, for an enterprise value (EV) of Rs 4800 crore. The acquisition has strengthened the company's position in central India. RCCPL has an aggregate operational cement manufacturing capacity of 5.58 million tonne per annum (mtpa). It has three plants, including an integrated plant at Maihar in Madhya Pradesh, and grinding units at Kundanganj in Uttar Pradesh and Butiburi in Maharashtra.

For the first quarter of fiscal 2020, PAT was Rs 140 crore on net sales of Rs 1,883 crore as compared to PAT of Rs 84 crores on net sales of Rs 1,654 crores in first quarter of fiscal 2019.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 6361 5531
Profit After Tax (PAT) Rs crore 256 153
PAT Margin  % 4 2.7
Adjusted debt/Adjusted networth Times 1.2 1.3
Interest coverage Times 2.71 2.28

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs Cr) Rating assigned with outlook
NA Commercial paper NA NA 7 to 365 Days 300 CRISIL A1+
INE340A07068 Non-convertible debentures 13-Oct-2010 9.05% 13-Oct-2020 130 CRISIL AA/Stable
INE340A07050 Non-convertible debentures 29-March-2010 9.10% 29-March-2020 150 CRISIL AA/Stable
 
Annexure - List of Entities Consolidated
Full Consolidation: RCCPL Pvt Ltd
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  300.00  CRISIL A1+      29-08-18  CRISIL A1+    --    --  -- 
Non Convertible Debentures  LT  280.00
30-08-19 
CRISIL AA/Stable      29-08-18  CRISIL AA/Negative  31-08-17  CRISIL AA/Negative  01-08-16  CRISIL AA/Negative  CRISIL AA+/Watch Negative 
                    25-07-16  CRISIL AA/Negative   
                    05-02-16  CRISIL AA+/Watch Negative   
Short Term Debt (Including Commercial Paper)  ST              31-08-17  CRISIL A1+  01-08-16  CRISIL A1+  CRISIL A1+ 
                    25-07-16  CRISIL A1+   
                    05-02-16  CRISIL A1+/Watch Negative   
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cement Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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