Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A+/Stable/CRISIL A1’ ratings to the bank facilities and short-term debt programme of JSW Cement Limited (JSWCL).

 

The rating factors in JSWCL’s healthy business risk profile marked by increased geographical diversification in revenue and improving operating efficiency. The rating also factors the support JSWCL receives from the JSW group and financial flexibility it enjoys being part of the group. These strengths are partially offset by relatively higher receivable days, modest cash & bank balance, exposure to project related risks, susceptibility to industry specific risks such as volatility in input cost and realisations and cyclicality in the cement industry.

 

For fiscal 2021, JSWCL is likely to report sales volume in excess of 8 million tonne, up from 7.5 million tonne in fiscal 2020 driven by strong rebound in demand after the first quarter of fiscal 2021 coupled with benefits of commissioning of additional capacities at the start of the current fiscal. Earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne is expected in range of Rs 1,000-1,050 for the current fiscal aided by improving realisation and softening input cost during the first half. JSWCL’s gross debt to EBITDA ratio is expected in the range of 3.6-3.9 times by end of fiscal 2021 and below 3 times by end of fiscal 2023 and will be a key monitorable.

 

CRISIL Ratings has noted JSWCL’s around Rs 1,500 crore capacity expansion plan in its listed subsidiary Shiva Cement Ltd (SCL) over 3-5 years, in phases. CRISIL Ratings has also noted the JSW group’s ongoing discussions with potential private equity (PE) investors for diluting 10-15% stake in JSWCL for USD 200 million, which is likely to be concluded by April 2021. In case of successful transaction, the cash inflow is expected to be deployed to expand JSWCL’s cement manufacturing capacity to 25 MTPA by fiscal 2025. This expansion would be in addition to the Rs 1,500 crore scheduled expansion in SCL.

 

JSWCL had opted for moratorium on debt repayment from March to August 2020 under the Reserve Bank of India’s Covid-19 Regulatory Package.

Analytical Approach

CRISIL Ratings has considered 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 believes that JSWCL will likely receive distress support from the JSW group for timely servicing of debt, 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 high moral obligation for the group to support JSWCL, if required. JSWCL’s networth is adjusted for intangible assets.

 

Please refer Annexure: Details of entities consolidatied, 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 trillion as on January 27, 2021, and have healthy financial flexibility and ability to raise funds from lenders and capital markets as and when required.  The rating is sensitive to the credit risk profile of the JSW group. Any weakening in the group’s credit profile or significant enhancement in debt in the promoter holding companies vis-a-vis the market value of their investments in the operating companies will be 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 produce 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 Rs 535 crore equity 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 centralized 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 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 gain foothold in the relatively attractive eastern markets.

 

• Improving operating efficiency: JSWCL’s operating efficiency has improved, driven by 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. Ebitda per tonne improved to Rs 811 in fiscal 2020 from less than Rs 700 in the previous two years, aided by increased sale of blended cement and high margin GGBS (margin of 35-40%). JSWCL is likely to report Ebitda per tonne in range of Rs 1,000-1,050 for fiscal 2021 driven by improving realisation and softening input prices. Sustenance of Ebitda per tonne at these levels given the competition and regulatory challenges will be a key monitorable.

 

Weaknesses

• Relatively higher receivable days and modest cash & bank balance: JSWCL’s has higher proportion of institutional sales (60-65%) leading to higher working capital intensity as seen in receivable over 50 days in past. The debtor days are expected to remain relatively higher due to continued sales to institutional customer given the product mix and sales push given capacity ramp up happening. Fund-based working capital utilisation was high at 90% on average for the 12 months through November 2020. Further due to aggressive capacity expansion undertaken in last five years largely funded through debt and internal accruals has led to minimal cash accumulation. Additionally JSWCL has also extended loans & advances to group companies. The company is likely to maintain Rs 50-60 crore cash and bank balance as it enjoys financial flexibility as part of the JSW group.

 

• Substantial capacity expansion plan: JSWCL has announced Rs 1,500 crore capital expenditure (capex) in SCL over 3-5 years in phases. Under phase I, SCL plans to set up 1.4 MTPA clinker unit, 1 MTPA grinding unit for Rs 850 crore and 8 megawatt (MW) waste heat recovery plant in Odisha by fiscal 2023. Phase II would involve setting up of a conveyor belt to transport limestone from mines to the clinker unit and own railway siding for seamless transportation of finished goods to the market. The capex is expected to be funded through debt and equity (including right issue). Once commissioned, the clinker unit is expected to meet JSWCL’s clinker requirement for the eastern region which is currently met through local/imported clinker. The company also plans debottlenecking at its existing grinding units to augment cement manufacturing capacity by 1.5-2.0 MTPA. It also have plans to increase overall capacity to 25 MTPA by fiscal 2025 subject to infusion of funds by PE investors. Hence, JSWCL is exposed to risks related to project execution and ability to ramp up new capacities.

 

• 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 pet coke prices in fiscal 2019 had impacted profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors.

Liquidity: Adequate

Net cash accrual for fiscals 2021 and 2022 is estimated at around Rs 1,000 crore combined against combined debt repayment of around Rs 700 crore during the period. Fund-based working capital limit utilisation averaged 90% for the 12 months through November 2020, and the company will likely maintain moderate cash and equivalent of Rs 50-60 crore on an ongoing basis. As part of the JSW group, JSWCL has adequate financial flexibility to raise funds or to refinance debt.

Outlook Stable

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

Rating Sensitivity Factors

Upward factors

• Gross debt to Ebitda ratio sustains below 2.25 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

• Gross debt to Ebitda ratio remaining above 3 times by the end of fiscal 2023 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

About the Company

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, 2020, JSWCL has cement manufacturing capacity of 14 MTPA spread across south (8 MTPA), west (2.2 MTPA) and east India (3.8 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).

 

In the first half of fiscal 2021, on a standalone basis, JSWCL had reported revenue and profit after tax of Rs 1,254 crore and Rs 56 crore respectively, against Rs 1,411 crore and Rs 90 crore, respectively, during the corresponding period of the previous fiscal.

Key Financial Indicators - CRISIL Adjusted numbers

As on/for the period ended March 31		2020	2019
Revenue	Rs crore	2,930	2,729
Profit after tax (PAT)	Rs crore	154	90
PAT margin	%	5.3	3.3
Adjusted debt/adjusted networth	Times	2.29	2.26
Interest coverage	Times	2.38	2.04

 

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	Term Loan	NA	NA	Dec-2025	531.60	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Oct-2022	207.47	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Sept-2028	1,160.00	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Mar-2024	155.81	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Sept-2026	163.70	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Mar-2021	29.00	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Mar-2025	85.00	NA	CRISIL A+/Stable
NA	Working Capital Demand loan	NA	NA	NA	100.00	NA	CRISIL A+/Stable
NA	Short term loan	NA	NA	NA	100.00	NA	CRISIL A1
NA	Cash Credit & Working Capital Demand loan	NA	NA	NA	214.00	NA	CRISIL A+/Stable
NA	Letter of Credit & Bank Guarantee	NA	NA	NA	225.0	NA	CRISIL A1
NA	Supplier Bill Discounting	NA	NA	NA	75.00	NA	CRISIL A1
NA	Proposed long term bank loan facility	NA	NA	NA	453.42	NA	CRISIL A+/Stable
NA	Short-term debt programme^	NA	NA	NA	110.00	Simple	CRISIL A1

^Yet to be issued/raised

Annexure – List of entities consolidated

Name of entity	Extent of consolidation	Rationale for consolidation
Shiva Cement Ltd	Full	Subsidiary
JSW Cement FZE, Fujairah	Full	Subsidiary
Utkarsh Transport Pvt Ltd	Full	Subsidiary
JSW Green Cement Pvt Ltd	Full	Subsidiary