Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities, short term debt programme and commercial paper programme of JSW Cement Limited (JSWCL).

 

The ratings continue to factor in JSWCL’s strong business risk profile backed by sizeable capacity and geographical diversification in revenue as well as healthy financial risk profile. The ratings also factor in the support JSWCL receives from the JSW group and the financial flexibility it enjoys from being a part of the group. These strengths are partially offset by relatively higher receivable days, exposure to project-related risks, susceptibility to industry-specific risks such as volatility in input cost and realisations coupled with cyclicality in the cement industry.

 

For fiscal 2022, sales volume on consolidated basis increased around 14% [9.8 million tonne (mt) compared to 8.6 mt in fiscal 2021], which lead to an overall revenue growth of 21%. This was driven by healthy demand during the fourth quarter of fiscal 2022 coupled with benefits of commissioning of additional capacities during the fiscal. However, EBITDA per ton (excluding non-operating other income) witnessed a decline to Rs 781 from Rs 984 in fiscal 2021 on the back of increase in power and fuel cost for the company especially in the second half of fiscal 2022. In fiscal 2023, sales volumes are expected to grow at a healthy pace supported by healthy demand from the increased infrastructure expenditure planned by the government. The operating margins on the contrary are expected to remain range bound owing to continued cost pressures related to freight and power & fuel costs, especially during the first of fiscal 2023.

 

As envisaged, JSWCL has concluded the equity raising of Rs 1500 from private equity (PE) investors and Rs 100 crore from SBI Bank during fiscal 2022. The transaction is a structured private equity deal wherein compulsorily convertible preference shares (CCPS) are being issued to the investors and the conversion of such CCPS into common equity of the company will be linked to the future performance and valuation determined before the initial public offering. This investment is being used by JSWCL for its capacity expansion from current ~17 MTPA to 25 MTPA by end of fiscal 2024/25. JSWCL is progressing on schedule for the capacity expansion plan including the Rs 1,525 crore capacity expansion plan in its listed subsidiary Shiva Cement Ltd (SCL). For expansion in SCL, Rs 1066 crore will be funded through debt and the rest through infusion from JSWCL and/or right issue at SCL.

 

On account of this transaction leverage and liquidity have improved with gearing at 0.96 times as on March 31, 2022 (2.05 as on March 31, 2021) and cash and equivalent balance of Rs 634 crore as on March 31, 2022, while market position would strengthen further once the capacity addition completes over the medium term.

 

Debt protection metrics have moderated in fiscal 2022 with interest cover at 2.6 times (3 times in fiscal 2021) due to weaker accruals, however, the same is expected to improve with recovery in profitability. Net debt to EBITDA on the other hand has improved to 3.28 times from 3.61 times, however, the improvement is lower than anticipated due to lower operating profits on account of cost pressures during the fiscal faced by the cement industry. The financial risk profile would remain comfortable over the medium term driven by healthy capital structure and adequate liquidity. As the current phase of expansion would be largely over by fiscal 2024/25, key credit ratios are expected to improve thereafter and hence, remain a key monitorable.

Analytical Approach

CRISIL Ratings has considered the consolidated business and financial risk profiles of JSWCL and its subsidiaries and has applied its group notch-up framework to factor in the support expected from the JSW group to arrive at the rating. CRISIL Ratings believes JSWCL will likely receive distress support from the JSW group for timely debt servicing, given the operational linkages between key group companies (specifically JSW Steel Limited and JSW Energy Limited), past instance of equity infusion by the JSW group, and the shared name and logo which imply a high moral obligation on the group to support JSWCL, if required. JSWCL’s networth is adjusted for intangible assets.

 

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:

Support from, and financial flexibility being part of, JSW Group

The JSW group is a leading conglomerate with strong presence in the steel, energy, cement and infrastructure sectors. Its listed companies had combined market capitalisation of over Rs 1.9 lakh crore as on July 26, 2022, and have healthy financial flexibility and ability to raise funds from lenders and capital markets as and when required.  The rating of JSWCL is sensitive to the credit risk profile of the JSW group. Any weakening in the group’s credit risk profile or significant enhancement in debt in the promoter holding companies vis-à-vis the market value of their investments in the operating companies will be a key rating sensitivity.

 

JSWCL was initially set up to utilise the slag being produced as a by-product by the group's flagship company, JSW Steel Ltd, to manufacture slag-based cement. JSWCL is majorly owned by Adarsh Advisory Services Pvt Ltd which is fully owned by Sajjan Jindal Family Trust. Mr. Parth Jindal, son of Mr. Sajjan Jindal, is the Managing Director of the company. JSWCL continues to receive operational support by way of supply of slag from JSW Steel Ltd; power from JSW Energy Ltd and port service from JSW Infrastructure Ltd. The group infused equity of Rs 535 crore in JSWCL in fiscal 2018 to support its expansion plans. JSWCL also benefits from the JSW group’s common logo and brand, shared premises with JSW Steel for the Dolvi (Maharashtra) and Vijayanagar (Karnataka) plants, and centralised coal procurement and logistic arrangement. CRISIL Ratings believes JSWCL will receive operational and managerial support on ongoing basis and financial support on need basis.

 

Increasing geographical diversification in revenue

JSWCL has established its market position in southern, western and eastern India over the past five years. The company set up its first grinding unit in 2009 in Vijayanagar and commissioned its first integrated plant in fiscal 2013 in Nandyal (Andhra Pradesh). It acquired a 0.6 MTPA grinding unit in Dolvi from JSW Steel Ltd in fiscal 2015, which helped to spread its reach in Mumbai and Pune and improve operating profitability given the better market scenario in western India. The geographical presence has benefited further post its expansion in Salboni (West Bengal) and Jajpur (Odisha) in fiscals 2018 and 2020, respectively, which has helped it to gain foothold in the relatively attractive eastern markets. Presently, JSWCL’s region wise capacity stands at 9.0 MTPA in South, 5.1 MTPA in East and 2.5 MTPA in West.

 

Healthy operating efficiency

JSWCL’s operating efficiency arises from sale of portland slag cement (PSC; having high blending ratio of slag) and ground granulated blast furnace slag (GGBS) in southern and western India, which leads to lower power, fuel, and raw material consumption per tonne of cement. Proximity of grinding facilities to raw material sources as well as market reduces freight costs.

 

Profitability moderated in fiscal 2022 with EBITDA per ton declining to Rs 781 from Rs 984 due to elevated power and fuel costs, however, operating efficiencies and profitability are likely to remain adequate over the medium term.

 

Healthy financial risk profile driven by liquidity

Despite significant capacity additions (5-6 million tonne) over the past five fiscals capital structure has improved for JSWCL supported by the PE investment which concluded in fiscal 2022. Leverage and liquidity have improved with gearing at 0.96 times as on March 31, 2022 (2.05 as on March 31, 2021) and cash and equivalent balance of Rs 634 crore as on March 31, 2022. Net debt to EBITDA has improved to 3.28 times from 3.61 times, however, the improvement is lower than anticipated due to lower operating profits on account of cost pressures during the fiscal faced by the cement industry.

 

The additional debt expected on account of the capex undertaken in SCL will not impact the overall financial metrics as a similar amount of debt is expected to be repaid over the same period. Liquidity is expected to be better than historical levels as JSWCL is likely to maintain minimum Rs 300-400 crore of liquidity in the form of cash/FD/liquid investment/undrawn bank lines going forward apart from the financial flexibility derived as part of the JSW group.

 

Weakness:

Relatively higher receivable days: Higher proportion of institutional sales and sales push to increase utilization of the increased capacity have led to higher working capital intensity as seen in receivables of 50-60 days in the past three years. The debtor days are expected to remain relatively higher owing to continued sales to institutional customer given the product mix and sales push with increase in capacity.

 

Substantial capacity expansion plan: JSWCL is underway aggressive capacity addition wherein overall cement grinding capacity is expected to increase to 25 MTPA by fiscal 2024 from the current 17 MTPA. The cost of expansion spread over FY23-25 (including the railway sliding being planned in SCL) is around Rs 2,500-3,000 crore which is being funded through equity infusion Rs 1,600 crore from PE investors, Rs 1,066 crore term debt contracted at SCL (subsidiary), right issue planned at SCL and the balance from debt/internal accrual. Given the size of capex relative to existing operations, JSWCL is exposed to risks related to project execution and ability to ramp up new capacities. Timely commencement of commercial operations, within budgeted costs, will remain key monitorable.

 

Susceptibility to volatility in input cost and 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 large number of players adding capacity during the peak of a cycle. This has led to unfavourable price cycles for the sector. Moreover, profitability remains susceptible to volatility in input prices, including raw material, power, fuel and freight. Increase in coal and pet coke prices in fiscal 2022 had impacted the profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors.

Liquidity: Strong

JSWCL has a cash and equivalent balance of Rs 634 crore as on March 31, 2022 along with moderately utilized working capital limits for the last six months through June 2022. Net cash accrual for fiscal 2023 is estimated at around Rs 550-600 crore against debt repayment of around Rs 600 crore. The company will likely maintain liquidity of Rs 300-400 crore on an ongoing basis (higher than historical trend). Furthermore as part of the JSW group, JSWCL has adequate financial flexibility to raise funds or refinance debt in a timely manner.

Outlook: Stable

CRISIL Ratings believes JSWCL will continue to benefit from healthy operating efficiency, increasing geographical presence with operationalization of new capacities and overall healthy demand outlook for the cement sector.

Rating Sensitivity Factors

Upward factors

• Net debt to Ebitda ratio sustains below 2.5 times driven by sharp and sustained improvement in profitability or accelerated deleveraging or combination of both.
• Significant improvement in liquidity driven by reduced working capital intensity
• Significant improvement in the credit risk profile of the JSW group

 

Downward factors

• Net debt to Ebitda ratio remaining above 3-3.5 times over medium term due to lower-than-expected profitability or higher debt availed or combination of both.
• Significant weakening in the credit risk profile of the JSW group or change in support philosophy of the group towards JSWCL
• Weakening liquidity due to higher working capital intensity or capital structure constrained by increased capex or cost or time overruns in capacity expansion
• Additional investments or loans extended to group companies or unrelated businesses from JSWCL’s cash flows

About the Company

JSW Cement Limited (JSWCL) part of JSW group was incorporated in 2006, with its' first unit of 0.6 MTPA grinding capacity at Vijayanagar commissioned in fiscal 2009. As on March 31, 2022, JSWCL has cement manufacturing capacity of 16.9 MTPA spread across south (9.4 MTPA), west (2.2 MTPA) and east India (5.3 MTPA) and clinker capacity of 3.4 MTPA including 1 MTPA in Fujairah (UAE). JSWCL manufactures various grades of cements such as PSC (Portland Slag Cement), OPC (ordinary portland cement), CHD (Concreel HD), GGBS (ground granulated blast furnace slag) and CPC (composite cement).

Key Financial Indicators - Consolidated - CRISIL Ratings Adjusted numbers

As on/for the period ended March 31		2022*	2021
Revenue	Rs crore	4,677	3,878
Profit After Tax (PAT)	Rs crore	233	250
PAT Margin	%	5.0	6.4
Adjusted debt/adjusted networth	Times	0.96	2.05
Interest coverage	Times	2.57	3.02

*Provisional

Any other information: Not applicable