Rating Rationale
September 04, 2020 | Mumbai
Kesoram Industries Limited
'CRISIL D' assigned to NCD 
 
Rating Action
Rs.1650 Crore Non Convertible Debentures CRISIL D (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL D' rating to the non-convertible debentures (NCDs) of Kesoram Industries Limited (KIL).
 
The rating reflects the ongoing delays in debt servicing, weak financial risk profile marked by stretched liquidity and weak debt protection metrics, and exposure to cyclicality in the cement industry. These weaknesses are partially offset by its established market position in cement industry and long track record of the company.
 
KIL has been in default since January 2020. These irregularities are mainly on account of KIL's liquidity mismatch and high leverage. The company is already in discussion with the lenders for implementing a resolution plan, as per which a part of the existing debt will be converted into compulsory redeemable preference shares (CRPS) of Rs 408 crore (such portion of CRPS shall be reduced by the amount of recoveries made by the lenders during the period April 01, 2020 to August 31, 2020), while Rs 200 crore of working capital debt will be refinanced and the balance debt will be paid upfront through the proceeds of the NCDs. KIL has already signed a non-binding agreement with a new investor for infusion of funds through NCDs.
 
Fund infusion and refinancing of working capital limits would help regularise the delays in debt servicing and augment liquidity for working capital and other business needs, and thus would be key monitorables. Additionally, cash accrual is expected to improve over the medium term owing to healthy cement realisations, as seen in the first quarter of fiscal 2021 and shift towards high margin PPC product. Cash accrual would still be tightly matched against total funds needed to meet debt obligation, committed capital expenditure (capex) and working capital requirement. The resolution plan factors in equity infusion (in fiscal 2023) and debt refinancing (in fiscal 2026) apart from internal accruals to support repayments for NCDs starting in fiscal 2023.
 
Timely implementation of the resolution plan, regularisation of over dues, sustenance of improved operating performance, and track record of timely debt servicing are crucial for improvement in KIL's credit risk profile.

Analytical Approach

To arrive at its ratings, CRISIL has consolidated its wholly owned subsidiary Cygnet Industries Limited (CIL), because KIL has provided corporate guarantee to the debt of CIL and both the companies have common management. KIL had demerged the tyre business to Birla Tyres Ltd (BTL) in fiscal 2020. CRISIL has not consolidated BTL as both operate in different businesses and there are no fungible cash flows or cross holdings between them.

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
Weaknesses
* Delays in debt servicing: KIL has delayed meeting its debt obligation since January 9, 2020, owing to liquidity mismatch and the overdue position continues.
 
* Weak financial risk profile and stretched liquidity: Continued losses at the profit after tax (PAT) level has eroded networth. Debt protection metrics are also weak, as reflected in interest coverage ratio below 1 time and negative accrual in the past. After the demerger of the loss-making tyre business, the metrics are expected to improve due to the relatively strong performance of the cement business. However, the same would continue to be modest in relation to the total debt.
 
Liquidity is stretched, as seen in delay in debt servicing. Liquidity is expected to improve post-infusion of funds from the new investor and moratorium (as per the resolution plan) on its term repayments. However, high premium payment on NCD redemption and tightly matched cash flows will continue to exert pressure on liquidity over the medium term. The resolution plan factors in the equity infusion to support the debt repayments once the first instalment of NCDs fall due in fiscal 2023 and debt refinancing in fiscal 2026 to fully retire the NCDs.
 
* Exposure to cyclicality in cement industry: Cement players, including KIL, are susceptible to volatility in input cost due to operating leverage in the cost structure. Furthermore, intense competition may continue to constrain scalability, pricing power, and profitability. Capacity additions in the commoditised cement industry tend to be sporadic because of long gestation periods associated with setting up new facilities, and the large number of players adding capacities during the peak of a cycle. This has led to unfavourable price cycles for the sector in the past. Cyclical downturns in the industry result in slow sales, thereby constraining the operating rate and ability to pass on any rise in input costs.
 
Strengths
* Established market position in cement industry: KIL has aggregate cement manufacturing capacity of 7.25 million tonne per annum (mtpa) located in Karnataka and Telangana with key markets being southern and western regions. Furthermore, abundant availability of limestone at its captive mine and captive power generation results in operational efficiency. Moreover, benefits from the promoters' experience of over four decades, their strong understanding of local market dynamics, and healthy relationships with customers and suppliers should continue to support the business.
 
* Long track record of the company: KIL has been operating for over 10 decades (incorporated on October 18, 1919, as Kesoram Cotton Mills Ltd) and is currently managed by Ms Manjushree Khaitan (daughter of Mr B K Birla) after the demise of Mr B K Birla in July 2019.
Liquidity Poor

Cash accrual is currently insufficient to meet debt obligation as the company continues to have overdues in existing bank facilities. Liquidity is expected to improve with long-term fund infusion from new investors and moratorium on its term repayment. However, high premium on NCD repayments and tightly matched cash flows would continue to exert pressure on liquidity over the medium term. Furthermore, internal accrual would be insufficient to service the debt repayments and timely equity infusion and debt refinancing would be crucial for meeting debt obligation over the medium term.

Rating Sensitivity Factors
Upward factors
* Successful implementation of the resolution plan and sustainable improvement in financial risk profile
* Track record of timely debt servicing and debt service coverage ratio of above 1 time.

About the Company

KIL, part of the B K Birla group of companies, is a diversified conglomerate that manufactures cement and rayon. Cement contributed 88% of the consolidated revenue as on March 31, 2020, while the remaining 12% is from rayon. The cement units have an aggregate capacity of 7.25 mtpa and are located in Karnataka and Telangana. The rayon, paper and chemical businesses are housed under 100% subsidiary, CIL, whose plant is in West Bengal.
 
Earlier, during fiscal 2020, the National Company Law Tribunal has approved demerger of the tyre business of KIL on November 08, 2019, and the scheme became effective from December 04, 2019, with appointed date being January 01, 2019. Demerger of the tyre business is expected to improve KIL's credit risk profile as the cement business has been consistently profitable while the tyre business has been a drag on the overall performance.
 
For the first quarter of fiscal 2021, on a consolidated basis, KIL reported net loss from continuing operations and total revenue of Rs 16 crore and Rs 427 crore, respectively, against PAT from continuing operations and total revenue of Rs 47 crore and Rs 801 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators - (Consolidated; CRISIL Adjusted)
Particulars Unit 2020 2019
Revenue Rs.Crore 2,655 2,946
Profit After Tax (PAT) Rs.Crore (188) (363)
PAT Margin % -7.1 -12.3
Adjusted debt/adjusted networth Times -22.33 28.32
Adjusted interest coverage Times 0.78 0.99

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.Cr) Complexity
Levels
Rating Assigned with Outlook
NA NCD* NA NA NA 1650 Simple CRISIL D
*Yet to be issued
 
Annexure - List of Entities Consolidated
Name of Entities consolidated Extent of consolidation Rationale for consolidation
Cygnet Industries Limited Full Common promoter, support through unsecured loans and corporate guarantee extended to debt
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
Non Convertible Debentures  LT  0.00
04-09-20 
CRISIL D    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for Consolidation
Understanding CRISILs Ratings and Rating Scales

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