| Dalmia Bharat Limited | ||||||
| Ratings removed from 'Watch Developing'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has removed its ratings on the bank facilities of Dalmia Bharat Limited (DBL) from ‘Rating Watch with Developing Implications’ and has reaffirmed the ratings at ‘CRISIL AA+/CRISIL A1+’ while assigning a ‘Stable’ outlook on the long term rating.
CRISIL Ratings had earlier placed the ratings of DBL on ‘Watch developing’ following the announcement on December 12, 2022, by DBL (holding company of DCBL), that DCBL has entered into a 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. In absence of finer details of the deal, its impact on DBL’s credit risk profile was not ascertainable. Subsequently, DBL announced on February 04, 2023, that DCBL has signed definitive agreement with JAL for acquisition of cement grinding (5.2 MTPA), clinker (3.3 MTPA) and thermal power plants (TPP) of aggregate capacity of 280 MW (which includes transfer of 180 MW TPP to a special purpose vehicle of which 57% stake shall be held by DCBL) for an enterprise value of Rs 3,230 crore and is in process of completing the remaining part of acquisition as per the framework agreement dated December 12, 2022. Accordingly, CRISIL Ratings has now factored the entire acquisition in the assessment of the credit risk profile of DBL and has resolved the rating watch.
The ratings reflect the strong business risk profile of the DBL group, backed by established and diversified market position across northeast, south, east and west regions, and its cost-efficient operations. The ratings further factor in the strong financial risk profile of the group, evident from moderate 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 estimated to take capital expenditure (capex) of over Rs 15,000 crore during fiscals 2023-2026 (including ~Rs 5,600 crore towards acquisition of JAL’s assets), to increase various clinker and grinding capacities along with investments in waste heat recovery system (WHRS), solar power capacities, and towards improving cost efficiency and plant maintenance. The group also intends to increase the capacity to 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 are yet to be announced.
CRISIL Ratings understands that capex will be funded through a mix of long-term debt and internal cash accrual. This is likely to result in rise in leverage in the interim. However, financial risk profile is expected to remain healthy with expectations of improvement in operating performance and rise in sales volume, leading to increase in free cash flow. Any further large, debt-funded capex or acquisition, resulting in significant rise in leverage and debt servicing will, thus, remain a key monitorable |
Analytical Approach
Further, CRISIL Ratings has not consolidated the refractory business of the group that is housed under Dalmia Bharat Refractories Ltd (DBRL) and its subsidiaries. This is because DBRL had ceased to be a subsidiary of DCBL or DBL and there is no cash flow fungibility and operating linkages between DBRL and the 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
It is setting up additional 12 MTPA in grinding capacity organically 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 to 23.7 MTPA by fiscal 2024 (from 20.9 MTPA as on September 30, 2022) and addition of 106 megawatt (MW) of captive power by way of WHRS and solar power capacities in fiscal 2023 (of which 91 MW is implemented by January 2023), which should lower power costs. With the completion of acquisition, the company is expected to add 9.4 MT of grinding capacity by fiscal 2024.
Healthy operating profitability, led by 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 clinker 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 1,363 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 the first half of fiscal 2023, wherein Ebitda further fell to Rs 805 per tonne due to sustained high coal and petcoke prices. However, with reduction in petcoke/coal price from July 2022 onwards, the operating performance improved in the third quarter of fiscal 2023 with Ebitda per tonne of Rs 1,024 along with better realisation, backed by healthy demand from infrastructure and rural segment. CRISIL Ratings estimates EBITDA per ton to improve from current levels and is expected to surpass Rs 1,000 from fiscal 2024 onwards over medium term.
Strong presence in fast growing eastern market with entry into central region to aid absorption of new capacities The group derives majority of its volumes from the east and northeast markets. The company is also entering central region where the 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 regions.
Strong financial risk profile Financial risk profile remains 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 time as on March 31, 2022, from 0.41 time 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 0.86 times. Interest coverage ratio improved to 13.19 times in fiscal 2022 from 9.83 times in fiscal 2021, and net cash accrual to adjusted debt ratio rose to 75% from 67%. As the company is undertaking capex towards both existing announced capex and acquisition, debt levels are expected to rise with net debt/EBITDA of 2.35 times in fiscal 2024. However, given the expectation of further improvement in operating performance and ability of the company to defer part of the existing capex by 1-2 years, net debt to EBITDA ratio (excluding market value of investment in IEX) is expected to improve to below 2 times from fiscal 2025 onwards.
The company also has investment of Rs 1,863 crore in IEX Ltd (holds 14.8% stake) and holds 42.6% stake in DBRL which are expected to act as a buffer in case of liquidity constraints.
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 15,000 crore by fiscal 2026. 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 and coal prices during the first six months of fiscal 2023 impacted profitability of all cement players severely. Further, the cement prices have remained volatile notwithstanding the rise in input costs, which has aggravated the cost pressure on profitability of cement players. |
Liquidity: Strong Financial flexibility remains strong, with cash and cash equivalents of Rs 1,288 crore as on December 31, 2022. It is further supported by its investment in IEX Ltd, valued at Rs 1,863 crore as on December 31, 2022 and investments in DBRL. The company also has access to fund-based bank limit to meet short-term liquidity mismatch. Expected net cash accrual projected at more than Rs 2,500 crore in fiscal 2024 and surplus liquidity should suffice to cover debt obligation and requirement of equity funding in the incremental capex.
Environment, social and governance (ESG) profile The ESG profile of DBL supports its already strong credit risk profile. The cement sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption. This is because of energy-intensive cement manufacturing process and high dependence on natural resources such as limestone and coal as key raw materials. The sector has social impact due to its nature of operations, affecting local community and health hazards. DBL has continuously focused on mitigating these environmental and social risks.
Key ESG highlights
|
Outlook: Stable The DBL group will continue to benefit from its strong market position, healthy operating efficiency, and strong liquidity |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Company DBL is the listed holding company of the cement business of the DBL group. It owns 100% of DCBL, which is the main operating company and houses the entire cement business of the group. DBL also owns 100% in DPL (non-operational company). At standalone level, it derives revenue from providing management services to group companies.
The DBL group’s total investment in IEX is valued at Rs 1,863 crore as on December 31, 2022. The group has categorised 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. For the first nine months of fiscal 2023, operating income increased by 21.8% to Rs 9,628 crore owing to 16.7% increase in volume and 4.4% increase in realisation while Ebitda per tonne fell by Rs 236 to Rs 880. Profit after tax (PAT) for the same period fell by 19.9% to Rs 450 crore. |
Key financials of DBL (parent company; consolidated and CRISIL Ratings-adjusted numbers)
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
|
Annexure – List of entities consolidated
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||
|
This Annexure has been updated on 20-Mar-23 in line with the lender-wise facility details as on 15-Jan-23 received from the rated entity.
Criteria Details
|