Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank loan facilities, commercial paper programme and fixed deposits of JK Lakshmi Cement Ltd (JKLC). The ratings continue to reflect the healthy business risk profile of the company, backed by its established market position in the northern region and highly cost-efficient operations; along with strong financial risk profile, driven by robust liquidity. These strengths are partially offset by exposure related to project implementation risk and susceptibility to risks relating to varying input costs, realisations and cyclicality in the cement industry.

 

For fiscal 2023, consolidated operating income grew 18.8% over fiscal 2022 driven by volume growth (5.6%) and improvement in realisations (12.5%). Profitability, as measured by earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne stood at Rs 710 in fiscal 2023 compared to Rs 849 in fiscal 2022 owing to increase in the prices of coal/ petcoke (the key input for the company).

 

In the first half of fiscal 2024, operating income increased 9.2% on year-on-year basis owing to 9.4% growth in volume backed by healthy demand. In the current fiscal, volumes are expected to grow between 9-11% and profitability to improve with expected improvement in realisations and moderation in input costs during the fiscal.

 

Financial leverage as measured by net debt to Ebitda increased to 1.4 times as on March 31, 2023 with progress of the debt funded capacity expansion (capex) in Udaipur Cement Works Ltd (UCWL) and lower accruals owing to increase in input prices during fiscal 2023, after reducing to less than 1 time as on March 31, 2022. Net debt to Ebitda is expected to increase further in fiscal 2024 with continued capacity expansion but will sustain below 1.5 times from fiscal 2025 onwards with higher accruals over the medium term.

 

JKLC had announced a brownfield capex during fiscal 2022 under its subsidiary, UCWL, for setting up a 1.5 million tonne per annum (mtpa) clinker capacity, 2.5 mtpa of cement grinding capacity, along with waste heat recovery system (WHRS) plant and railway sidings. The estimated project cost of Rs 1,650 crore is to be funded through a debt of Rs 1,100 crore (being guaranteed by JKLC), internal accrual of Rs 100 crore and rights issue of UCWL. The project is largely on track and is expected to get commissioned ahead of its scheduled CoD of September 2024. Though the company remains exposed to project execution risk, past track record of successfully completing various capacity addition projects provides comfort.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JKLC and its associate and subsidiary companies as these 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:

• Healthy market position in the northern region: JKLC has integrated cement capacities in Sirohi, Udaipur (both in Rajasthan), and Durg (Chhattisgarh); and grinding units in Jhajjar (Haryana), Cuttack (Odisha), Kalol and Surat (both in Gujarat). The cement from its Sirohi, Jhajjar, Kalol and Surat plant is primarily sold in Rajasthan, Gujarat and Madhya Pradesh, which contribute to more than ~75% of the sales from aforementioned plants, while Chhattisgarh and Odisha contributes to ~65% of cement from its Durg and Cuttack unit. The company also has an arrangement through which it has outsourced capacity in Amethi (Uttar Pradesh) with expectation of ramp up in production in fiscal 2024, which will further diversify the presence.

 

• Cost-efficient operations: The plants are highly cost-efficient and JKLC is among the lowest cost producers in the cement industry. Proximity between plants and captive limestone mines assure supply of key raw material at low rates. Furthermore, the rising share of captive power sourcing through a total of 221 megawatt (MW) at consolidated level, that includes CPP of 74 MW, WHRS plant of 41 MW and solar power plant of 103 MW makes the operations self-sufficient by meeting majority of the power requirement. Strategic locations of these plants ensure competitive freight cost as compared to other industry players. Proximity to raw materials, rise in captive sourcing of power and competitive freight costs will continue to ensure high-cost efficiency over the medium term.

 

• Healthy financial risk profile: With strong operating performance, financial risk profile improved in fiscal 2022 with net debt to Ebitda ratio of below 1 time and interest coverage ratio above 7 times during fiscal 2022. Net debt to Ebitda increased to 1.4 times in fiscal 2023 as the company front loaded capex in fiscal 2023 along increased working capital requirement and lower accrual. Net debt to Ebitda is expected to increase further in fiscal 2024 with continued capacity expansion but will sustain below 1.5 times from fiscal 2025 onwards with higher accruals over the medium term. Further, with the expectation of increase in operating profitability, higher accruals from increased volumes, and existing debt expected to be repaid over the same period, the financial risk profile is expected to remain healthy over medium term.

 

Further, being part of the JK group (eastern zone), coupled with extensive promoter experience and strong liquidity lends adequate financial flexibility to the company. Liquidity has been strong at over Rs 400 crore maintained over the past decade (around Rs 691 crore as on March 31, 2023) at consolidated level and is likely to remain so over the medium term as well. This helps the company to tidy over any unforeseen adversity considering the cyclical nature of the cement industry. Large unutilised fund-based bank limit also lends additional cushion to liquidity.

 

Weaknesses:

• Exposure to project-related risks: The capex of around Rs 1,650 crore in UCWL is to be funded through debt of Rs 1,100 crore, internal accrual of Rs 100 crore and rights issue in UCWL of Rs 450 crore completed this fiscal. Thus, the company is exposed to risks related to project execution and ability to ramp-up new capacity.

 

• 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 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 coal and pet coke prices in fiscals 2022 and 2023 impacted profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors. The company also remains exposed to fluctuations in fuel and cement prices.

Liquidity: Strong

JKLC has maintained healthy liquidity of above Rs 400 crore over the past decade and is likely to continue doing so over the medium term. Fund-based working capital limit of Rs 300 crore remained largely unutilised during the twelve months ended November 2023. Cash accrual and liquidity will be adequate to repay debt of around Rs 280 crore and Rs 600 crore in fiscals 2024 and 2025, respectively on consolidated basis, and fund planned capex.

 

ESG Profile

CRISIL Ratings believes that JKLC’s Environment, Social, and Governance (ESG) profile 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 its high dependence on natural resources such as limestone, coal as key raw materials. The sector has a social impact due to its nature of operations affecting local community and health hazards involved. However, JKLC has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• JKLC is working on enhancing AFR (alternative fuel and raw material) capability in its Sirohi plant. The company is targeting to achieve a thermal substitution rate of 20% by FY 2030.
• JKLC has set the target to meet 100% of total electrical energy requirements through renewable energy by 2040.
• The company is targeting to become 5 times water positive by FY2025.
• Its governance structure is characterised by 50% of its board comprising independent directors, split in chairman and CEO positions, dedicated investor grievance redressal system and extensive disclosures.

There is growing importance of ESG among investors and lenders. JKLC’s commitment to ESG will play a key role in enhancing stakeholder confidence, given the high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes JKLC will continue to benefit from its healthy business risk profile and strong financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors:

• Improved business risk profile on the back of significant improvement in market share on a sustained basis
• Sustained improvement in Ebitda per tonne above Rs 1200

 

Downward factors:

• Weakening of business risk profile due to loss of market share, and Ebitda per tonne declining below Rs 700 on a sustained basis
• Substantial delay in capex leading to cost and time overruns

About the Company

JKLC is part of the JK group (eastern zone) and was promoted by the late Mr Lala Lakshmipat Singhania and his son, the late Mr Hari Shankar Singhania. The company is presently headed by Mr Bharat Hari Singhania, (Chairman) and Smt Vinita Singhania (Vice Chairperson and Managing Director).

 

JKLC had set up its first cement plant in 1982 with 0.5 mtpa capacity, which has now grown to a total cement capacity of 14.0 mtpa and clinker capacity of 8.5 mtpa as on December 31, 2022. It has integrated units in Sirohi, Udaipur and Durg; and grinding units in Jhajjar, Cuttack, Kalol and Surat. It has a total of 221 MW of captive power capacity on a consolidated level, which includes, thermal power plant of 74 MW, WHR plant of 41 MW, solar power plant of 103 MW along with power purchase agreement for wind power capacity of 4 MW.

 

For the six months ended September 30, 2023, on consolidated basis JKLC reported profit after tax (PAT) of Rs 175.6 crore and operating income of Rs 3,304.8 crore as against Rs 176.9 crore and Rs 3,027.7 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Term loan	NA	NA	Sep-25	52.5	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	Sep-25	65.63	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	Sep-25	56.88	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	Dec-25	45.68	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	Mar-33	78	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	Dec-33	64.29	NA	CRISIL AA/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	161.01	NA	CRISIL AA/Stable
NA	External commercial borrowings	NA	NA	May-29	175	NA	CRISIL AA/Stable
NA	Fund-based facilities	NA	NA	NA	120	NA	CRISIL AA/Stable
NA	Fund-based facilities	NA	NA	NA	100	NA	CRISIL AA/Stable
NA	Fund-based facilities	NA	NA	NA	50	NA	CRISIL AA/Stable
NA	Fund-based facilities	NA	NA	NA	30	NA	CRISIL AA/Stable
NA	Non-fund based limit	NA	NA	NA	280	NA	CRISIL A1+
NA	Non-fund based limit	NA	NA	NA	200	NA	CRISIL A1+
NA	Non-fund based limit	NA	NA	NA	125	NA	CRISIL A1+
NA	Non-fund based limit	NA	NA	NA	245	NA	CRISIL A1+
NA	Non-fund based limit	NA	NA	NA	100	NA	CRISIL A1+
NA	Non-fund based limit	NA	NA	NA	150	NA	CRISIL A1+
NA	Commercial paper*	NA	NA	7-365 days	175	Simple	CRISIL A1+
NA	Fixed deposit	NA	NA	NA	100	Simple	CRISIL AA/Stable