Rating Rationale
September 29, 2020 | Mumbai
JK Lakshmi Cement Limited
Rating Reaffirmed 
 
Rating Action
Rs.175 Crore Commercial Paper* CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Carved out of working capital limits
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of JK Lakshmi Cement Limited (JKLC).
 
The rating continues to reflect JKLC's healthy business risk profile marked by established market position in the northern region & highly cost-efficient operations, and healthy financial flexibility, driven by strong liquidity. These strengths are partially offset by susceptibility to risks relating to varying input costs and realisations, and cyclicality in the cement industry.
 
For fiscal 2020, the operating income grew by 1% as operations were impacted by lockdown during the last 10 days of March. In Q1 of fiscal 2021 operating income decline by 13% due to decline in sales volume by 18% following extension of lockdowns by various state governments as well as central government towards containment of COVID-19. Operating margins however, improved to 18.9% as against 16.3% in Q1 of last year driven by healthy realisations and cost efficiency measures enacted by the company.
 
Despite the impact of the lockdowns at the end of the fiscal 2020, the company managed to improve its financial risk profile. Net debt to EBITDA improved to 1.89 times in fiscal 2020 from 3.85 times in fiscal 2019 driven by healthy operating margins leading to high cash accruals.
 
The ratings also factor in the moratorium availed by JKLC on its bank facilities in accordance with the relief measures provided by the Reserve Bank of India on March 27, 2020.

Analytical Approach

For arriving at the ratings, CRISIL 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.

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 at Sirohi and Udaipur (both in Rajasthan) and Durg (Chhattisgarh), and grinding units at Jhajjar (Haryana), Cuttack (Orissa), Kalol and Surat (both in Gujarat). Sales in the northern and western regions, mainly comprising Rajasthan, Gujarat, Punjab, Haryana, and parts of Uttar Pradesh, contribute around 75% to the revenue. With the commissioning of Odisha grinding unit the company has further diversified its presence in the eastern region and is gradually ramping-up capacity utilisation from these units.
 
* Cost-efficient operations:
The plants are highly cost efficient and amongst the lowest cost producers in the cement industry. Proximity between plants and captive limestone mines, assures supply of the key raw material at low rates. Further, self-sufficiency in power, through a total of 105 MW of captive power capacity, which includes, CPP of 74 MW, WHR plant of 21 MW and solar power plant of 10 MW, which makes the entire operations almost self-sufficient in power. At its Sirohi integrated unit, company is in process of commissioning another CPP of 10 MW by September 2021. Strategic location of these plants ensures competitive freight cost, as compared to other industry players. Proximity to raw materials, self-sufficiency in power and competitive freight costs will continue to ensure high cost efficiency for JKLC over the medium term.
 
* Healthy financial flexibility:
Being a JK group (eastern zone) company, coupled with extensive promoter experience and strong liquidity lends adequate financial flexibility to the company. JKLC's liquidity is strong as is evident in average liquidity of over Rs 400 crore maintained over the past decade (liquidity as on March 31, 2020: Rs. 480 crore) and expectations of maintaining the similar levels going forward also, to tide over any adversity, considering cyclical nature of the cement industry. Large unutilised fund based bank limit also lends additional cushion to the overall liquidity. Further, with capacity expansions now almost complete, accruals are expected to improve with ramp up in capacities.
 
Weaknesses
* Average, though improving, debt protection metrics:
Significant capacity additions (of around 7 million tonnes) over the past five years, have led to a highly leveraged capital structure. Debt levels and capital structure had peaked during past 2-3 years, as the company was under expansion mode, and accruals had not started then. This also led to average debt protection metrics. Net gearing and net debt (net of cash and cash equivalents) to earnings before interest, tax, depreciation and amortisation (EBITDA) ratios improved significantly to 1.24 times and 1.89 times, respectively, as on March 31, 2020 (vis-a-vis 1.53 times and 3.85 times, respectively, as on March 31, 2019). Interest coverage and net cash accrual to net debt ratios of 3.75 times and 0.21 time, respectively for fiscal 2020 (vis-a-vis 2.0 times and 0.11 time, respectively) are average despite significant improvement. However, with completion of the project-related capex and gradual ramp up of capacities, debt levels are expected to reduce and overall capital structure is expected to improve further over the medium term. CRISIL will continue to monitor the ramp up and improvement in capital structure of the company.
 
* Susceptibility to risks relating to input costs, realisations and cyclicality in cement industry:
Profitability remains susceptible to volatility in prices of inputs, including raw material, power, fuel and freight, in line with the industry. Increase in petcoke and diesel prices over the past two years, impacted overall profitability of several cement players, including JKLC, though it has now started to come down. Realisations and profitability also get impacted by demand, supply, offtake and other regional factors. Subdued price realizations have impacted the overall profitability of the company. Fresh capacities take 3-4 years to become operational and stabilise, and expansions tend to be lumpy, with most players setting up capacities simultaneously, in anticipation of better offtake. Thus, coupled with non-viability of small capacities, often leads to oversupply in the initial years after capacities become operational.
Liquidity Strong

Liquidity is strong as is evident in average liquidity of over Rs 400 crore maintained over the past decade (liquidity as on March 31, 2020: Rs. 480 crore). Company is expected to maintain similar levels of liquidity going forward. Working capital limits of Rs. 250 crore utilised on an average of 47% for 12 months ending July 31, 2020, also adds to the overall liquidity.

Rating Sensitivity Factors
Downward Factors
* Moderation in business risk profile from weaker than expected profitability on a continuous basis.
* Significant weakening of liquidity or financial flexibility with cash and cash equivalents declining below Rs 300-350 crore along with high utilisation of working capital limits.

About the Company

JKLC is part of the JK group (eastern zone) and was promoted by the late Lala Lakshmipat Singhania and his son late Mr. Hari Shankar Singhania. The company is presently headed by Mr. Bharat Hari Singhania, Chairman and Managing Director. The company had set up its first cement plant in 1982 with 0.5 mtpa capacity, which has now grown to a total cement capacity of 12.5 mtpa and clinker capacity of 7.87 mtpa. It has integrated units at Sirohi and Udaipur (both in Rajasthan) and Durg (Chhattisgarh); and grinding units at Jhajjar (Haryana), Cuttack (Odisha) and Kalol and Surat (both in Gujarat). It also has a CPP at Sirohi of 54 MW, WHR plant of 14 MW and solar power plant of 6 MW, which makes the entire northern region almost self-sufficient in power. The Udaipur unit was sourcing power from the grid, however, post commissioning of the integrated unit in March 2017, it sourced power from its 6 MW WHR plant. At its Durg integrated unit, company has already commissioned 7 MW WHR plant, and has a CPP of 20 MW.
 
For the 3 months ended June 30, 2020, operating income and reported profit after tax (PAT) were Rs 912 crore and Rs 51 crore, respectively, against Rs 1042 crore and Rs 39 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)
Particulars Unit 2020 2019
Revenue Rs.Crore 4,373 4,323
Profit After Tax (PAT) Rs.Crore 253 41
PAT Margin % 5.8 0.9
Adjusted net debt/adjusted networth Times 1.24 1.53
Interest coverage Times 3.75 2.00

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 NA 175 Simple CRISIL A1+
*Carved out of working capital limits
 
Annexure - List of Entities Consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
Hansdeep Industries and Trading Co Ltd Full consolidation Significant operational and financial linkages
Udaipur Cement Works Ltd Full consolidation Significant operational and financial linkages
Ram Kanta Properties Pvt Ltd Full consolidation Significant operational and financial linkages
Dwarkesh Energy Ltd Equity method Proportionate consolidation
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  175.00  CRISIL A1+      09-09-19  CRISIL A1+  11-05-18  CRISIL A1+  16-11-17  CRISIL A1+  -- 
            29-05-19  CRISIL A1+           
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cement Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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