Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position in South India: NCL is an established player in the cement industry with a long track record of more than 3 decades and has installed clinker and cement capacities of 2.6 million tonnes per annum (MTPA) and 2.7 MTPA respectively. Abundant availability of limestone in its captive mines along with availability of captive power of 23.5 MW (Solar – 8 MW, Hydel – 7.5 MW and waste heat recovery – 8 MW) adequate to meet 30-35% of its requirement and advantageous location results in moderate operating efficiency. Further the company has diversified its product profile by venturing into other building material such as ready-mix concrete, cement bonded particle boards and doors. The products are marketed under the brands “Nagarjuna Cement”, “Nagarjuna RMC”, “Bison Panels” and “NCL doors”.

Healthy financial risk profile: Net worth and gearing were healthy at around Rs 744 crore and 0.45 time, respectively as of March 31, 2022. Debt protection metrics were also comfortable with interest coverage and net cash accrual to total debt ratios of 8.37 times and 0.37 time, respectively, for fiscal 2022. The company is expected to undertake additional debt funded capital expenditure of over Rs 150 crore to increase its cement capacity by 0.7 MTPA which is expected to take about 18 months’ time after receiving the required approvals. Despite the planned debt funded capital expenditure, financial risk profile is expected to remain comfortable with gearing expected to remain below 0.5 time over the medium term.

Weakness:

Exposure to intense competition and to risks related to volatility in raw material prices:

Cement players, including NCL, are susceptible to fluctuations in the prices of coal/petcoke, various raw material (other than limestone which is captively available), packing material and diesel. Against this, exposure to intense competition and limited product differentiation limits the pricing flexibility of players.

Susceptibility to risks related to the commoditised nature of products and cyclicality in the cement industry: Capacity additions in the commoditised cement industry tend to be sporadic because of long gestation periods associated with setting up of new facilities and numerous players adding capacities during the peak of a cycle. This has led to unfavorable price cycles for the sector in the past. Cyclical downturns in the industry result in slow offtake, constraining the operating rate and the ability of players to pass on any rise in input costs..