Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities and commercial paper programme of Dalmia Bharat Limited (DBL; part of the DBL group) continue to reflect the group’s healthy business risk profile backed by its established and diversified market position across south, east, west, and north-east India, and its cost-efficient operations. The ratings further take into account its healthy financial risk profile, supported by low leverage and strong liquidity. These strengths are partially offset by relatively lower return on capital employed (RoCE) and susceptibility to risks relating to input cost and realisations, and 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 48.4 million tonne per annum (mtpa) and clinker capacity to 23.4 mtpa by end of fiscal 2024, along with investments in waste heat recovery system (WHRS) and solar power capacities, and capex for improving cost efficiencies and regular maintenance. CRISIL Ratings understands this will be funded through a mix of debt and internal accrual. However, it is likely to result only in a moderate rise in leverage, given the expectation of stable operating performance and healthy accrual levels. Any significant debt-funded capex or acquisition beyond the announced capex or any deterioration in accrual levels will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of DBL, Dalmia Cement (Bharat) Ltd (DCBL; CRISIL AA+/Stable/CRISIL A1+) 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]), collectively referred to as the DBL group, as they have common management and strong business and financial linkages.

 

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:

• Healthy 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 35.9 mtpa as on January 31, 2022. It 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. It has outperformed the market, reflected in revenue growing faster than overall cement demand over the past eight fiscals, resulting in gain in share across key markets.

 

It is setting up 12.5 mtpa grinding capacity across its existing regions (6.9 mtpa brownfield and 5.5 mtpa greenfield), which should further consolidate its market presence. This will be supported by increase in clinker capacity by 4.4 mtpa to 23.4 mtpa and addition of 127 MW of captive power through WHRS and solar power capacities, which should lower power cost.

 

• Robust operating profitability, led by cost efficiency:

Operating performance remained strong over the past six fiscals, with earnings before interest, tax, depreciation, and amortisation (Ebitda) per tonne consistently above Rs 1,000. This was driven by improvement in utilisation to 72% in fiscal 2021 from 51% in fiscal 2016, healthy realisations led by pick-up in demand and strong brand, focus on premium segments and stable operating cost led by various measures boosting overall cost efficiency.

 

Some of the measures undertaken by the group include 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 fuel cost optimally. These measures, 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.

 

In the first nine months of fiscal 2022, however, Ebitda per tonne fell to Rs 1,117 owing to rise in input cost led by power, fuel (on account of higher coal and pet-coke prices) and logistics (higher diesel prices). However, with expected improvement in demand and realisations, EBITDA per tonne is expected to remain above Rs 1,200 in fiscals 2022 and 2023.

 

• Strong presence in the fast-growing eastern India market to aid absorption of new capacities:

East and north-east markets accounted for around 64% of the group’s volumes in fiscal 2021. These markets are expected see higher growth compared to pan-India level over the medium term. This should aid in better absorption of the incremental capacity in the region.

 

• Strong financial flexibility and financial risk profile:

The financial risk profile of the group improved significantly in fiscal 2021, aided by strong operating performance. Gross debt fell by Rs 2,223 crore to Rs 3,737 crore as on March 31, 2021. As a result, gearing declined to 0.4 time as on March 31, 2021, from 0.9 time a year earlier, and net debt to Ebitda ratio fell to 0.1 time from 1.9 times. Interest coverage ratio improved to 9.9 times in fiscal 2021 from 5.5 times in fiscal 2020, and net cash accrual to adjusted debt ratio rose to 68% from 28%. As the company is undertaking capex of around Rs 10,000 crore, debt levels are expected to inch up. However, given the expectation of a stable operating performance, net debt to EBITDA level is expected remain lower than 1 time.

 

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. Furthermore, it is undertaking capex of around Rs 10,000 crore over the next three fiscals. This is likely to lead to a significant increase in capital employed and result in 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 levels. Any marked deviation due to lower profitability levels and higher-than-expected debt funding or acquisition will be a key monitorable.

 

• Susceptibility to risks relating to input cost, realisations, and cyclicality in the cement industry:

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 is susceptible to volatility in input prices, including raw material, power, fuel, and freight. Increase in pet coke, coal, and diesel prices in the first nine months of fiscal 2022 impacted profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake, and other regional factors.

Liquidity: Strong

Financial flexibility is strong, reflected in cash balance and liquid investments of Rs 1,878 crore as on December 31, 2021. Liquidity is further supported by the group’s investment in IEX, which was valued at Rs 3,365 crore as on December 31, 2021. Utilisation of around Rs 700 crore of fund-based working capital limit was minimal over the past 12 months. Expected net cash accrual of over Rs 2,000 crore in fiscal 2022 and surplus liquidity should suffice to cover debt obligation and majority of incremental capex.

Outlook: Stable

CRISIL Ratings believes the DBL group will continue to benefit from its healthy market position, robust operating efficiency, and strong liquidity.

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) of less than unity on a sustained basis

 

Downward factors:

• Delayed recovery in demand
• Any substantial debt-funded capex or acquisition or decline in profitability levels to result in net debt to Ebitda ratio (excluding value of IEX shares) of 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 (a non-operational company). At a standalone level, DBL derives revenue by providing management services to group companies. As on date, there is no outstanding commercial paper issued by DBL.

 

DCBL is the fourth-largest cement manufacturer in the country with installed capacity of 35.9 mtpa as on January 31, 2022. The company has presence across the east (capacity of 16.8 mtpa), south (12 mtpa), north-east (4.2 mtpa) and west (2.9 mtpa) markets. It also has captive thermal power plants of 228 MW, captive solar power plants of 24.4 MW and WHRS of 31.3 MW.

 

DPL is a non-operational company. Its assets mainly consist of a part of the group’s investment in equity shares of IEX (listed entity).

All the group entities have common management and treasury operations

Any other information: Not applicable