Detailed Rationale

Crisil Ratings has upgraded its ratings on the bank loan facilities of Nexion Surfaces Pvt Ltd (NSPL; a part of the Simpolo group) to 'Crisil AA-/Stable/Crisil A1+’ from 'Crisil A+/Positive/Crisil A1’.

 

The upgrade in ratings reflects the significant improvement in the business risk profile of the group over the years. Revenue (at group level) has grown at a likely compound annual growth rate of 36% for the past five fiscals to more than Rs 1,850 crore projected for fiscal 2025 (from Rs 1,672 crore in fiscal 2024), in line with expectations. Growth was driven by higher volume, with capacity additions, timely ramp up, increased contribution from value-added products, healthy utilisation of installed capacity and higher realisations. Operating margin has been maintained at a healthy 16.5-17.0% for the four fiscals through 2024 despite volatility in input prices (including the volatile global natural gas prices during fiscal 2023), reflecting the group’s ability to quickly pass on the increased input cost. The group is planning a capital expenditure (capex) of Rs 975 crore, with two new manufacturing plants in Tirupati (Andhra Pradesh) and Malia (Gujarat), to double the group’s overall manufacturing capacity. The Tirupati plant is expected to be operational in the first quarter of fiscal 2026 and the Malia plant in the fourth quarter of fiscal 2026. Revenue growth of 15-20% is projected over the medium term, driven by capacity addition, while the margin remains healthy at above 16%.

 

Financial risk profile has been healthy, with networth of Rs 1,125 crore, gearing of 0.09 time and total outside liabilities to tangible networth ratio of 0.34 time as on March 31, 2024. Although the capex is going to be funded through term loan and equity, overall gearing is expected to peak at just 0.33 time as on March 31, 2026. Debt protection metrics remain supported by steady profitability; interest coverage ratio improved to 15.4 times in fiscal 2024 from 7.9 times in fiscal 2023. Liquidity stood healthy, with sufficient cash accrual against repayment obligation, moderate bank limit utilisation and adequate free funds.

 

The ratings reflect the extensive experience of the promoters in the ceramic industry along with the group’s strong marketing set up and brand, comfortable financial risk profile and proximity to sources of raw materials and labour. These strengths are partially offset by susceptibility to volatility in raw material prices, intense competition, cyclicality in the end-user industries and risks related to completion of the new capacities with ramp up in operations.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of Simpolo Vitrified Pvt Ltd (SVPL) along with its wholly owned subsidiaries, NSPL and Simpolo International Pvt Ltd (SIPL), collectively referred to herein as the Simpolo group.

 

Crisil Ratings has applied its parent notch-up criteria to factor in in the support received by NSPL from the parent, SVPL.

 

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:

• Established market position and extensive experience of the promoters: The promoters have extensive experience in the ceramic industry; their strong understanding of market dynamics and healthy relationships with customers and suppliers will continue to support the group’s business. The group sells its products under the Simpolo brand and is expected to benefit from the premium brand of NSPL, Nexion, which caters to premium tiles. The group has established a strong distribution network in the domestic and international markets, as reflected in its expanding geographic footprint. In India, the group has a network of more than 1,500 dealers and 25 experience centres or unique kiosks/showrooms. It undertook an elaborate campaign to spread awareness about its brand.

 

• Comfortable financial risk profile: The capital structure has been healthy, with networth of Rs 1,125 crore, gearing of 0.09 time and total outside liabilities to tangible networth ratio of 0.34 time as on March 31, 2024. Debt protection metrics remain supported by steady profitability, with interest coverage ratio of 15.4 times and net cash accrual to adjusted debt ratio of 2.4 times for fiscal 2024. With the infusion of funds by private equity amounting Rs 414 crore during fiscal 2023 and the subsequent deployment of such funds towards prepayment of term loan along with cash credit outstanding balance, the financial risk profile of the group improved significantly and is expected to remain robust over the medium term despite the ongoing capex of Rs 975 crore expected to conclude in fiscal 2026.

 

• Proximity to sources of raw materials and labour: The manufacturing facility is in Morbi, Gujarat, which is a ceramic hub and accounts for 70-80% of ceramic tiles production in the country. This facilitates easy access to clay (key raw material), contractors, skilled labour and critical infrastructure, such as gas and power. Transportation cost is also low as Morbi is close to the major ports of Kandla and Mundra.

 

Weaknesses:

• Susceptibility to volatility in raw material and natural gas prices: Raw materials, such as different types of clays, feldspar, silica, kiln and carbonates, account for around 40% of the total cost of sales of ceramic tiles, while gas and power account for 25-30%. Over time, there has been a huge variation in fuel cost resulting in increased fuel cost for most companies. Although the Simpolo group has been able to maintain its margin so far, sustenance of the margin will be a key monitorable over the medium term.

 

• Exposure to intense competition and cyclicality in the real estate segment: The ceramic tiles industry is intensely competitive with many unorganised players. However, with the closure of ceramic units running on coal gasifiers and implementation of the Goods and Services Tax and Real Estate (Regulation and Development) Act, 2016, the market share of organised players has expanded recently. Despite being a leading player, the Simpolo group has to compete with other reputed brands such as Kajaria Ceramics Ltd, H & R Johnson (India) (a division of Prism Cement Ltd), Asian Granito India Ltd, Somany Ceramics Pvt Ltd and Orient Bell Ltd. Hence, ability of the group to pass on any increase in raw material cost remains a key rating sensitivity factor. Also, any moderation in demand from real estate entities results in pricing pressure and lower offtake.

 

• Timely completion of capex and ramp up in scale: The group is expected to complete the ongoing capex (worth Rs 975 crore) in the next 12 months. The same will be funded through a term loan of about Rs 444 crore and the balance through equity and internal cash accrual, resulting in marginal impact on gearing. However timely completion of the capex with no major cost overrun and ramp up of operations will remain monitorable over the medium term.

Liquidity: Strong

Liquidity should remain supported by the ample surplus available in cash accrual and bank lines. Bank limit utilisation was just 21.32% on average for the 12 months through November 2024. Cash accrual is projected at Rs 260-320 crore per annum, against yearly debt obligation of Rs 20-74 crore over the medium term. Current ratio was also healthy at 2.64 times on March 31, 2024. The promoters are likely to extend need-based funds (equity and unsecured loans) to aid operations. Unencumbered funds (short-term fixed deposits) amounting to over Rs 100 crore as of January 2025 will boost financial flexibility.

Outlook: Stable

The Simpolo group will continue to benefit from the extensive experience of the promoters and their established relationship with clients along with its robust financial risk profile.

Rating sensitivity factors

Upward factors:

• Significant revenue growth per fiscal while maintaining healthy operating margin, resulting in cash accrual above Rs 350 crore on a sustained basis
• Stable working capital cycle and financial risk profile
• Timely completion of the capex at Tirupati and Malia without cost overrun

 

Downward factors:

• Sharp decline in revenue and/or operating margin dropping below 12%, leading to lower-than-expected cash accrual
• Larger-than-expected, debt-funded capex or a sizeable stretch in the working capital cycle
• Delay in project completion, leading to pressure on operating margin

About the Group

SVPL was incorporated in September 2007 by Mr Jitendra Aghara and his family members. The company manufactures and markets vitrified tiles under the Simpolo brand. It commenced commercial production in November 2008 at its facility in Morbi.

 

NSPL, established in March 2022, was formed when Nexion International Pvt Ltd shifted its business to the Simpolo group and transferred its vitrified tiles business to NSPL vide the National Company Law Tribunal order dated July 21, 2023. NSPL is now a wholly owned subsidiary of SVPL. NSPL manufactures glazed vitrified tiles, polished glazed vitrified tiles, large slabs and indoor and outdoor ventilated facades and other ceramic products. It markets its premium products under the Nexion and Ispira brands. Its facility is in Morbi.

 

SIPL, incorporated in May 2023, is setting up plants near Tirupati and Malia for manufacturing vitrified tiles.

 

The group is headed by Mr Jitendra Thakarshi Aghara (managing director) and his family members.

Any other information: Not Applicable