Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities of Dalmia Bharat Limited (DBL) on ‘Rating Watch with Developing Implications’ while reaffirming the ratings at ‘CRISIL AA+/CRISIL A1+’

 

CRISIL Ratings has placed the ratings on ‘Watch Developing’ following the announcement on December 12, 2022 that Dalmia Cement (Bharat) Ltd (DCBL; wholly owned subsidiary of DBL) entered into framework agreement for acquisition of cement grinding (9.4 million tonne per annum [MTPA]), clinker (6.7 MTPA) and power plant assets (280 MW) from Jaiprakash Associates Ltd (JAL) and its associates for an enterprise value of Rs 5,666 crore on slump-sale basis. The transaction is in the initial stage and the structure is not finalised. Accordingly, the impact of the acquisition on the credit risk profile of DBL is currently not ascertainable. The watch will be resolved once details of the structure, such as timelines, cash outflow and funding pattern, are known and its subsequent impact on DBL’s credit risk profile can be ascertained.

 

The ratings reflect the DBL group’s healthy business risk profile, backed by established and diversified market position across north-east, south, east and west regions, and its cost-efficient operations. The ratings further factor in the healthy financial risk profile of the group, evident from low leverage and strong liquidity. These strengths are partially offset by relatively lower return on capital employed (RoCE), and susceptibility to risks related to volatility in input costs and realisations as well as inherent cyclicality in the cement industry.

 

The group is undertaking capital expenditure (capex) of around Rs 10,000 crore over fiscals 2022-2024, to increase grinding capacity to 49 MTPA and clinker capacity to 23.7 MTPA, along with investments in waste heat recovery system (WHRS) and solar power capacities, and capex towards improving cost efficiency and maintenance. Of this, the group has implemented total capex of Rs. 2,934 crore till the first half of fiscal 2023 (Rs. 1,769 crore in fiscal 2022 and Rs. 1,165 crore in fiscal 2023) and expect to implement the balance capex within stipulated timelines. The group has also announced its plan to increase the capacity further to 70-75 MTPA by fiscal 2027 in line with its aim to reach capacity of 110-130 MT by 2031. However, finer details of these additional expansion plans have not been finalized yet.

 

CRISIL Ratings understands that capex will be funded through a mix of long tenure debt and internal accruals. However, it is likely to result only in a moderate rise in leverage in the interim, owing to expectations of improvement in operating performance and rise in sales volume leading to increase in free cash flows. Any large, debt-funded capex or acquisition resulting in significant rise in leverage and debt servicing will, thus, remain a key monitorable

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of DBL, DCBL and its subsidiaries, and Dalmia Power Ltd (DPL; non-operational company holding a part of the group’s investment in Indian Energy Exchange Ltd [IEX]), as the entities, collectively referred to as the DBL group, have common management and strong business and financial linkages.

 

Further, CRISIL Ratings has not consolidated the refractory business of the group which is housed under Dalmia Bharat Refractories Ltd (DBRL) and its subsidiaries. This is because DBRL has ceased to be a subsidiary of DCBL or DBL and there is no cash flow fungibility and operating linkages between DBRL and DBL group.

 

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:

Strong market position

With a track record of seven decades, the DBL group is the fourth-largest cement player (by capacity) in India with operational capacity of 37 MTPA as on September 30, 2022. The group has diversified presence, with capacities in east (47% of total capacity) – Odisha, West Bengal, Jharkhand and Bihar; south (33%) – Tamil Nadu, Andhra Pradesh and Karnataka; north-east (12%) – Assam and Meghalaya; and west (8%) – Maharashtra. The group has outperformed the market, with revenue growing faster than overall cement demand over the past decade, resulting in gain in market share across key markets.

 

It is setting up additional 12 MTPA in grinding capacity across its existing regions (7.5 MTPA brownfield & debottlenecking and 4.5 MTPA greenfield) by fiscal 2024, which should further consolidate its market presence. This will be supported by increase in clinker capacity by 2.8 MTPA from 20.9 MTPA as on September 30, 2022 to 23.7 MTPA by fiscal 2024 and addition of 44 megawatt (MW) of captive power by way of WHRS and solar power capacities in second half of fiscal 2023, which should lower power costs.

 

Healthy operating profitability, led by cost efficiency

Operating performance was strong over the past several fiscals, with earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne consistently above Rs 1,000 driven by improvement in utilisation to 72% in fiscal 2021 from 58% in fiscal 2016. However, the utilization fell to 62% in fiscal 2022 due to addition of capacity in the second half of fiscal 2022. Higher EBITDA per ton was also aided by healthy realisations led by pick-up in demand and strong brand, focus on premium segments, and relatively stable operating cost led by various measures boosting overall cost efficiency.

 

Some of the measures undertaken by the group in the recent past to improve efficiency includes a) increasing the share of blended cement in overall mix, resulting in reduced consumption of energy and raw material per tonne of cement; b) lowering lead distances, with most cement units located close to raw material sources and major cement markets; and c) switching to multi-fuel kilns, which helped in managing overall fuel cost optimally. These efficiencies, along with lower fuel and input prices, resulted in EBITDA per tonne rising to Rs 1,369 in fiscal 2021 from Rs 1,057 in fiscal 2019.

 

During fiscal 2022, however, EBITDA per tonne fell to Rs 1,114 owing to steep rise in input costs across the industry led by high power and fuel (on account of higher coal and pet-coke prices) and logistics (higher diesel prices) costs. The downturn in profitability continued during first half of fiscal 2023, wherein EBITDA further fell to Rs. 805 per ton due to sustained high coal and petcoke prices. The realisation achieved during fiscal 2022 and in first half of fiscal 2023 was not enough to offset the impact of higher cost of production. However, with expected pick-up in demand and rise in cement prices during second half of fiscal 2023 along with softening of petcoke / coal prices, CRISIL Ratings estimates EBITDA per ton to improve from current levels and expected to surpass Rs 1000 in fiscal 2024.

 

Strong presence in fast growing eastern market to aid absorption of new capacities

The group derives majority of its volumes from the east and northeast markets. These markets are expected to see higher growth than pan-India markets over the medium term. This should aid in better absorption of the incremental capacity in the region.

 

Strong financial risk profile

The financial risk profile of the group continues to remain strong, aided by healthy operating performance. The company reduced gross debt by nearly Rs 608 crore to Rs 3,119 crore as on March 31, 2022. Thus, gearing improved to 0.25 times as on March 31, 2022, from 0.42 times as on March 31, 2021, and the net debt to EBITDA ratio (excluding market value of investment in IEX) decreased to 0.68 times from 0.84 times. Interest coverage ratio improved to 13.19 times in fiscal 2022 from 9.91 times in fiscal 2021, and net cash accrual to adjusted debt ratio rose to 75% from 68%. As the company is undertaking capex of around Rs 10,000 crore, debt levels are expected to inch up. However, given the expectation of improvement in operating performance from current levels, net debt to EBITDA ratio (excluding market value of investment in IEX) is expected to remain below 1.5 times.

 

DBL has strong financial flexibility arising from its 100% owned subsidiaries - DCBL and DPL. CRISIL Ratings expects timely infusion of funds by its subsidiaries for meeting any debt obligation, considering common management and treasury operations across group entities.

 

Weaknesses:

Moderate return on capital

The group has undergone a few restructurings, resulting in recognition of intangibles. Further, it is undertaking capex of around Rs 10,000 crore by fiscal 2024. This should lead to a significant increase in capital employed, and a resultant rise in depreciation and amortisation expense, which in turn will lead to subdued return on capital. With the completion of ongoing capex, CRISIL Ratings expects return on capital to gradually improve with scaling up of assets and stable profitability. Any marked deviation due to lower profitability and higher-than-expected debt funding or acquisition leading to higher debt servicing will be a key monitorable.

 

Susceptibility to risks related to volatility in input cost / realisations, and cyclicality in cement sector

Capacity addition in the cement industry tends to be sporadic because of the long gestation period for setting up a facility and large number of players adding capacities during the peak of a cycle. This has led to unfavourable price cycles for the sector in the past. Moreover, profitability remains susceptible to volatility in input prices, including raw material, power, fuel and freight. Increase in pet coke & coal prices during the first six months of fiscal 2023 had impacted profitability of all cement players severely. Further, the cement prices have also remained volatile notwithstanding the rise in input costs which has aggravated the cost pressure on profitability of cement players.

Rating Sensitivity factors

Upward factors:

• Healthy ramp-up of ongoing capex while maintaining profitability, resulting in marked improvement in return on capital
• Stable profitability and declining debt, resulting in net debt to EBITDA ratio (excluding value of IEX shares) less than 1.0 times on a sustained basis

 

Downward factors:

• Further moderation in return on capital on a sustained basis
• Any substantial debt-funded capex or acquisition or decline in profitability resulting in net debt to EBITDA ratio (excluding value of IEX shares) more than 1.5 times on a sustained basis.

About the Company

DBL is the listed holding company of the cement business of the Dalmia Bharat group. It owns 100% of DCBL, which is the main operating company and houses the group’s entire cement business. DBL also owns 100% in DPL (non-operational company). At standalone level, DBL derives revenue by providing management services to group companies.

 

DCBL is the fourth-largest cement manufacturer in the country, with installed capacity of 37.0 MT as on September 30, 2022. The company has presence across the east (capacity of 17.7 MTPA), south (12.1 MTPA), northeast (4.3 MTPA) and west (2.9 MTPA) markets. It also has captive thermal power plants of 228 MW, captive solar power plants of 88 MW and a WHRS of 41 MW.

 

DPL is a non-operational company. Its assets mainly include a part of the group’s investment in equity shares of IEX (listed entity). The DBL group’s total investment in IEX is valued at Rs. 1,891 crore as on September 30, 2022. The group has categorized these investments as ‘non-core’ and classified them under current assets in the balance sheet.

 

All the group entities have common management and treasury operations.

Any other information: Not applicable