Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of JK Cement Limited (JKCL).

 

The rating continues to reflect the healthy business risk profile of JKCL, backed by its position as one of the largest white cement and wall putty manufacturers in India; its established market position in grey cement in the northern region; backward integration leading to cost-efficient operations; and strong financial risk profile driven by healthy liquidity. These strengths are partially offset by exposure to risks relating to project implementation and susceptibility to fluctuations in input costs and realisations, and cyclicality in the cement industry.

 

In the first half of fiscal 2023, consolidated operating income increased 24.6% on-year on account of a 13.2% increase in sales volume and 10% increase in realisation to partially pass on the increased cost. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin moderated to 15.8% in first half of fiscal 2023 from 20.3% in first half of fiscal 2022 because of higher input costs, especially power and fuel cost. The Ebitda margin may remain subdued in the second half of the fiscal as the impact of high-cost coal inventory would kick-in and will reflect in rise in power and fuel cost. Cement prices have not increased much in the key regions in the second half so far, meaning realisations may remain range bound. However, sales volume is likely to grow at a healthy pace in fiscal 2023, as the company through its subsidiary Jaykaycem (Central) Ltd starts dispatch from its new commissioned Panna and Hamirpur plant.

 

Consolidated operating income grew 21% in fiscal 2022 primarily driven by volume growth and higher realization to partially pass-on the increased cost of production. Ebitda per tonne moderated to Rs 1,128 in fiscal 2022 from Rs 1,341 in fiscal 2021 due to rise in input cost, especially power and fuel cost, which the company was not able to fully pass on.

 

Debt protection metrics moderated in fiscal 2022, as seen in net debt (gross debt less cash and cash equivalent) to Ebitda ratio of around 1.7 times as on March 31, 2022 against 1.1 times as on March 31, 2021. The same was primarily due to debt-funded capacity expansion undertaken by the company and higher working capital requirement along with moderation in cash accrual. However, liquidity is supported by strong cash and equivalents of more than Rs 1,000 crore maintained over the past two years.

 

With commissioning 4 MTPA of grey cement capacity during the third quarter of fiscal 2023, JKCL announced further grey cement capacity expansion of 5.5 MTPA (greenfield expansion of 3.5 MTPA and debottlenecking of 2 MTPA) at an estimated cost of Rs 1,161 crore to be funded via mix of internal accruals and debt. Of the 3.5 MTPA of greenfield expansion, one grinding unit of 1.5 MTPA will be set up in Ujjain, Madhya Pradesh, under JKCL by fiscal 2024 and one grinding unit of 2 MTPA in Prayagraj, Uttar Pradesh, along with clinker capacity addition of 0.66 MTPA in the Panna plant under Jaykaycem (Central) Ltd by the second quarter of fiscal 2025. Debottlenecking is expected to be completed by fiscal 2023.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JKCL and its associate and subsidiary companies as they are in similar lines of business and have strong financial, managerial and operational 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:

• Market leadership in white cement and wall putty segment along with established market position in grey cement segment in northern region

JKCL is one of the largest manufacturers of white cement (including wall putty) in India and one of leading manufacturer of white cement globally, with total white cement capacity of 1.48 MTPA (including UAE operations of 0.6 MTPA) and wall putty capacity of 1.33 MTPA. The white cement market in India is a duopoly, with high entry barriers that keep competitive intensity low.

 

JKCL had installed grey cement capacity of 18.67 MTPA as on December 31, 2022. It is one of the prominent players in northern region along with diverse presence across south, west and central region with plants across Rajasthan, Gujarat, Karnataka, Haryana, Uttar Pradesh and Madhya Pradesh. The ongoing expansion of 5.5 MTPA in the central region will further diversify geographical presence.

 

• Backward integration leading to cost efficiency

JKCL sources limestones (key raw material) from various captive mines adjacent to the integrated plants. It has mines in Rajasthan, Karnataka and Madhya Pradesh, having mining lease minimum till 2030. Its reserves are sufficient for existing operations as well as expansion planned over the medium term. Further, as on March 31, 2022, the company had captive power capacity of 162 MW (including waste heat recovery system [WHRS] of 42.3 MW), which meets majority of the power requirement. Strategic location of plants ensures competitive freight cost. Proximity to raw materials, captive power and competitive freight costs will continue to ensure high cost efficiency over the medium term.

 

• Healthy financial risk profile

The financial risk profile remains healthy despite moderation in debt protection metrics in fiscals 2022 and 2023. The net debt to Ebitda ratio declined to around 1.7 times as on March 31, 2022, from 1.1 times a year earlier, but is comfortable for the rating. The moderation was primarily on account of debt availed for higher capex undertaken in fiscal 2022 and higher working capital requirement to fund steep rise in raw material prices. Similarly, interest coverage declined to 6.02 times during fiscal 2022 from 6.53 times during fiscal 2021.

 

The net debt to Ebitda ratio and interest coverage ratio are expected to moderate further in fiscal 2023 as debt is being availed to fund capex in Jaykaycem (Central) Ltd and capex envisioned for the recently announced capacity expansion of 5.5 MTPA. This coincides with decline in Ebitda due to higher input cost. However, the debt protection metrics are likely to improve from fiscal 2024 as the recently commissioned capacities in Panna and Hamirpur plant would start positive contributing to profitability. Liquidity should remain healthy, with cash and equivalent above Rs 1,250 crore as on November 30, 2022.

 

Weaknesses:

• Exposure to project-related risks

Capex of Rs 1,161 crore in Jaykaycem (Central) Ltd and JKCL is to be funded through debt and internal cash accruals. Thus, project remains exposed to risks related to project execution and the ability to ramp up new capacity. However, the company’s track record of timely completion of projects of such scale mitigates the project execution risk to a large extent

 

• Susceptibility to risks relating to input costs, 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 the numerous players adding capacity during the peak of a cycle. This led to unfavourable price cycles for the sector in the past. Moreover, profitability remains exposed to volatility in input prices, including raw material, power, fuel and freight, as experienced during fiscals 2022 and 2023. The recent increase in pet coke prices has impacted profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors. Vulnerability to fluctuations in fuel and cement prices also persist.

Liquidity: Strong

Healthy net cash accrual of Rs 850-1,000 crore per annum for fiscals 2023 and 2024 are more than adequate to meet the yearly scheduled debt obligation. Further JKCL has cash and equivalents of more than Rs 1,250 crore as on November 30, 2022, which is likely to be maintained at healthy levels over the medium term. Fund-based working capital limit of Rs 375 crore was utilised at an average of 46% for the 12 months ended October 31, 2022.

 

Environment, social and governance (ESG) profile 

CRISIL Ratings believes the ESG profile of JKCL 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 as cement manufacturing process is energy intensive and its 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 involved.

However, JKCL has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights of JKCL: 

• JKCL plans to reduce greenhouse gas (GHG) emissions (Scope 1 + Scope 2) by 21.7% between fiscal 2020 to fiscal 2030 through reduction in clinker factor to the tune of 65% by producing more blended cement and to increase thermal substitution rate by 35% from baseline year of 2019-20 by partially replacing Kiln fossil fuel with biomass and alternate fuels & raw material (AFR).
• In fiscal 2022, the share of green energy in the overall energy consumption rose to 32% from 25% in fiscal 2021. It has target to increase green power share to 75% from baseline year of fiscal 2020.
• JKCL targets to increase thermal substitution rate by 35% for fiscal 2030 from baseline year of fiscal 2020 and achieve 5 times water positivity by fiscal 2030. It achieved water positivity of 4.6 times in fiscal 2022.
• The company reported loss time injury frequency rate (LTIFR) of 0.56 during fiscal 2022. It has adopted a zero-harm programme for achieving zero fatalities and injuries, both onsite and offsite, and has implemented a fully integrated environmental, health & safety (EHS) management system at its manufacturing plants.
• The governance structure is characterised by 50% of the board members being independent directors. The company’s chairman and executive positions are also split. 

 

There is a growing importance of ESG among investors and lenders. JKCL’s commitment to ESG will play a key role in enhancing stakeholder confidence and access to capital markets.

Rating Sensitivity factors

Downward factors:

• Business risk profile weakens, resulting from loss of market share along with Ebitda/ton declining below Rs 700 on a sustained basis.
• Higher than expected debt-funded capex or acquisition or decline in profitability levels resulting in net debt to Ebitda of more than 3 times on a sustained basis

About the Company

JKCL is part of the JK Organisation and was promoted by the late Dr Gaur Hari Singhania and his son, the late Mr Yadupati Singhania. The company is presently headed by the sons of Mr Nidhipati Singhania—Dr Raghavpat Singhania is the managing director and Mr Madhavkrishna Singhania is the deputy managing director and chief executive officer.

 

JKCL commenced operations in May 1975 with commercial production at its flagship grey cement unit at Nimbahera, Rajasthan. The company has installed grey cement capacity of 18.67 MTPA along with total white cement capacity of 1.48 MTPA (including UAE capacity) and wall putty capacity of 1.33 MTPA as on December 31, 2022. It had captive power capacity of 162 MW as on March 31, 2022, which includes a captive power plant of 102.50 MW, WHRS of 42.3 MW and solar & wind power of 17.2 MW.

 

In March 2022, the company announced to foray into the paint business with investment of Rs 600 crore spread over five years. In line with same, it acquired 60.0% stake in Acro Paints Ltd in January 2023 through wholly owned subsidiary JK Paints and Coatings Ltd, with the remaining stake expected to be acquired over the next 12 months. This will enable JKCL to provide a bouquet of products and increase market share through synergies from its network of dealers and painters.

 

In the first half of fiscal 2023, JKCL generated consolidated revenue of Rs 4,498 crore and profit after tax (PAT) of Rs 272 crore compared with revenue of Rs 3,609 crore and PAT of Rs 340 crore in the corresponding period of fiscal 2022.

Key Financial Indicators (Consolidated) – Adjusted by CRISIL Ratings

Particulars	Unit	2022	2021
Revenue	Rs crore	8,053	6,629
PAT	Rs crore	679	703
PAT margin	%	8.4	10.6
Adjusted debt/adjusted networth	Times	0.92	0.93
Interest coverage	Times	6.02	6.53

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Commercial paper	NA	NA	7-365 days	500	Simple	CRISIL A1+

 

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
J.K. Cement (Fujairah) FZC	Full	Significant operational and financial linkages
J.K. Cement Works (Fujairah) FZC	Full	Significant operational and financial linkages
Jaykaycem (Central) Ltd	Full	Significant operational and financial linkages
JK White Cement (Africa) Ltd	Full	Significant operational and financial linkages
JK Paints and Coatings Ltd	Full	Significant operational and financial linkages
Acro Paints Ltd	Full	Significant operational and financial linkages
Nay Energy Pvt Ltd	Equity method	Significant operational and financial linkages