Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to the Rs.350 crore non-convertible debentures (NCDs) of Nuvoco Vistas Corporation Limited (NVCL). The ratings on the other debt instruments and bank facilities have been reaffirmed at 'CRISIL AA/CRISIL AA-/Stable/CRISIL A1+'.

 

The rating continues to factor the improvement in the financial risk profile of NVCL on account of ongoing deleveraging. NVCL initiated the deleveraging exercise in August 2021 wherein the company raised Rs 1500 crores through fresh issue of equity shares via initial public offering (IPO) which was used for reduction of debt by Rs 1350 crore during fiscal 2022.

 

NVCL acquired Nu Vista Ltd (NVL, formerly known as Emami Cement Ltd) during early fiscal 2021, following which the leverage went up owing to debt-funded nature of the acquisition. The large incremental debt resulted in net debt to earnings before interest depreciation tax and amortisation (EBITDA) ratio rising to over 4 times for NVCL as on March 31, 2021. With the IPO proceeds and internal accruals for the fiscal net debt to EBITDA has reduced to 3.2 times as on March 31, 2022. CRISIL Ratings expects reduction in the leverage levels to ~ 2.5 times by end of fiscal 2023.

 

For fiscal 2022, NVCL’s operating income stood at Rs 9,318 crore and operating EBITDA per ton witnessed an improvement to Rs 841 during the fiscal despite the significant rise in cost of coal and petcoke supported by cost efficiency measures including increase in utilisation of alternate fuel sources through set up of waste heat recovery systems (WHRS) and operational benefits arising out of synergy. Operating income of Rs 2,653 crore has been reported in the first quarter of fiscal 2023, vis-à-vis Rs 2,203 crore in the corresponding period of the previous fiscal. EBITDA per ton for the quarter stood at Rs. 768.The performance is expected to improve in fiscal 2023 supported by improvement in realisations and healthy demand outlook in the eastern region, coupled with higher synergy benefits on account of increase scale of operations.

 

The company also benefits from its strong market position in Eastern India and diversification in North India. Cost optimisation initiatives (including the ramping up of captive power plants [CPP], WHRS and debottlenecking of current capacities) in the ongoing business and expected ramp-up of acquired assets along with deal synergies (product premiumisation and logistic synergies) shall also support the cash flow. NVCL enjoys healthy financial flexibility being part of the Nirma group.

 

These strengths are partially offset by a moderate though improving financial risk profile and susceptibility to variations in input costs and cyclicality in the cement industry.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of NVCL and NVL.

 

CRISIL Ratings has accorded 50% equity content to the perpetual NCDs of Rs 600 crore transferred to NVCL as part of the cement undertaking (as defined in the scheme of arrangement). This implies that in the analysis of the capital structure and financial ratios by CRISIL Ratings, 50% of the principal amount has been treated as equity and the remaining as debt. CRISIL Ratings has rated the perpetual NCDs one notch lower than the other traditional long-term bonds, in line with its criteria for rating corporate sector hybrids. This is based on the instrument's feature that allows flexibility to defer distribution payments and the likelihood of deferral, if required.

 

The rationale for an 'intermediate equity content' stems from the long tenure of the instrument, presence of a strong and legally binding replacement capital covenant that enhances the permanence of equity and its subordinate position in the capital structure, with flexibility to defer dividend distribution, if called upon. Furthermore, the instrument has similar characteristics as debt, including high fixed coupon, step-up of coupon up to 200 basis points (bps; 100 bps equals 1 percentage point) and a first-call option after seven years.

 

CRISIL Ratings has adjusted networth for amortisation of goodwill on account of acquisitions.

 

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

• Strong market position following acquisition of NVL: NVCL standalone was operating at very high capacity utilisation, with the acquisition of NVL it has increased its installed capacity (NVCL+ NVL) with a market share of 15-16% and has become market leader in eastern India. Following the acquisition, the market position of NVCL has improved, with overall capacity of 23.8 million tonne per annum (MTPA) across plants in Chhattisgarh, Jharkhand, Bihar, Odisha, Rajasthan and West Bengal. Presence of the split grinding units of NVL across eastern states and an integrated unit in Chhattisgarh complements the plants of NVCL in the eastern region.

 

Furthermore, in the northern region NVCL has an integrated plant in Chhittorgarh, a split blending unit in Haryana and an integrated unit in Nimbol. These units shall benefit from synergies, including rationalisation of the marketing network and cost savings because of ramp-up in scale of operations.

 

NVCL has its own captive limestone mines and clinker capacity and has set up CPPs and WHRSs across various plants. The established market position is supported by strong brands, such as Duraguard, Double bull, Concreto and Infracem, and an extensive network of dealers and sub dealers of NVCL and NVL. Strong brand equity provides the ability to command a premium for products.

 

With the acquisition, NVCL got access to adequate limestone reserves, which shall benefit the business over the medium term. Presence of grinding units in key states shall help in product optimisation as well as increase the market reach over the medium term. In fiscal 2022, NVCL and NVL achieved volume of about 17.8 MTPA, similar to fiscal 2021 levels. CRISIL Ratings expects demand recovery to be faster in the eastern region during fiscal 2023, which shall support revenue.

 

• Healthy operating efficiency: Operating efficiency has remained strong, with healthy profitability per tonne, driven by operational synergies with NVL, superior brand positioning and increase in captive capabilities for meeting power requirements.

 

For fiscal 2022, NVCL’s operating income was Rs 9,318 crore and operating EBITDA per ton stood at Rs 841 during the fiscal despite the significant rise in cost of coal and petcoke supported by cost efficiency measures including increase in utilisation of alternate fuel sources through utilisation of waste heat recovery systems (WHRS) and operational benefits arising out of synergies with NVL. Operating income of Rs 2,653 crore has been reported in the first quarter of fiscal 2023, vis-à-vis Rs 2,203 crore in the corresponding period of the previous fiscal. EBITDA per ton for the quarter stood at Rs. 768. The performance is expected to improve in fiscal 2023 supported by improvement in realisations and healthy demand outlook in the eastern region.

 

Weaknesses:

• Moderate, though improving, financial risk profile: The financial risk profile had been constrained because of the debt-funded acquisition of NVL. While leverage increased to above 4 times in fiscal 2021, it has corrected to about 3.2 times by the end of fiscal 2022 through the IPO proceeds and healthy internal accruals.

 

NVCL has planned capex of around Rs 2,500 crore over the next 3 years till fiscal 2025. The capex is towards capacity expansion and debottlenecking, which shall result in enhanced capacity and higher clinker availability and benefit NVCL over a longer duration. Also, consolidated cash accrual is likely to increase over the medium term, backed by cost initiatives (including the ramping up of CPP, WHRS and debottlenecking of current capacities) undertaken by the company and realisation of synergies. Utilisation of the accrual to reduce debt should further strengthen the debt protection metrics.

 

• Susceptibility to variations in input costs 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 numerous 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. Realisations and profitability are also affected by demand, supply, offtake and regional factors.

Liquidity: Strong

Liquidity is strong, backed by the ability to raise short- and long-term debt at short notice and competitive rates. NVCL and NVL have a combined sanctioned limit of about Rs 1,900 crore which are moderately utilised and cash and equivalents of about Rs 335 crore which also support liquidity. The company is likely to generate annual accruals of Rs ~1,300-1,500 crore over the two fiscals through fiscal 2024 which will support timely repayment of debt obligations.

Outlook: Stable

The stable outlook reflects sustenance of the improvement in financial risk profile of the company supported by its leading position in the eastern market

Rating Sensitivity factors

Upward factors

• Sustained improvement in cash accruals supported by improvement in operational efficiency and realization of synergies
• Reduction in debt levels resulting in Net debt to EBITDA below 1.5 times on sustained basis.

 

Downward factors

• Delay in improvement in net debt to EBITDA ratio to around 2.5 times
• Significant debt-funded growth plans

About the Company

NVCL manufactures cement and has installed capacity of 23.8 MTPA on consolidated basis. It operates around 53 RMX plants across India.  The company has integrated cement plants, grinding and blending units and a ready-mix concrete business. Operations are spread across West Bengal, Bihar, Jharkhand, Chhattisgarh, Delhi, Haryana, Rajasthan, Gujarat, Uttar Pradesh, Madhya Pradesh, Delhi and Odisha. The main brands are Concreto, Duraguard, Double bull and Infracem. NEPL and promoters of Nirma Group hold about ~71% in NVCL post IPO and NVL is 100% subsidiary of NVCL

Key Financial Indicators (Consolidated)*

Particulars	Unit	2022	2021
Revenue	Rs crore	9318	7441
Reported profit after tax (PAT)	Rs crore	32	-26
PAT margin	%	0.3	-0.3
Adjusted debt/adjusted networth	Times	1.3	1.4
Interest coverage	Times	2.7	2.2

*CRISIL Ratings-adjusted numbers for amortisation of goodwill; hence, PAT and networth will not match the reported numbers

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	Commercial Paper	NA	NA	7-365 days	500.0	Simple	CRISIL A1+
NA	Cash Credit & Working Capital Demand Loan	NA	NA	NA	37.5	NA	CRISIL AA/Stable
NA	Cash Credit & Working Capital Demand Loan#	NA	NA	NA	670.0	NA	CRISIL AA/Stable
NA	Cash Credit & Working Capital Demand Loan#	NA	NA	NA	375.0	NA	CRISIL AA/Stable
NA	Cash Credit & Working Capital Demand Loan^	NA	NA	NA	250.0	NA	CRISIL AA/Stable
NA	Cash Credit & Working Capital Demand Loan^^	NA	NA	NA	200.0	NA	CRISIL AA/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	95.0	NA	CRISIL A1+
NA	Term Loan	Sep-19	NA	Sep-23	115.0	NA	CRISIL AA/Stable
NA	Term Loan	Mar-21	NA	Mar-27	150.0	NA	CRISIL AA/Stable
NA	Term Loan	Sep-18	NA	Sep-25	265.0	NA	CRISIL AA/Stable
NA	Term Loan	Dec-18	NA	Dec-25	265.0	NA	CRISIL AA/Stable
NA	Term Loan	Mar-21	NA	Mar-27	200.0	NA	CRISIL AA/Stable
NA	Term Loan	Mar-21	NA	Mar-27	200.0	NA	CRISIL AA/Stable
NA	Term Loan	Jan-22	NA	Apr-30	300.0	NA	CRISIL AA/Stable
NA	Term Loan	Jan-22	NA	Apr-30	200.0	NA	CRISIL AA/Stable
NA	Term Loan	Jan-22	NA	Apr-30	350.0	NA	CRISIL AA/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	327.5	NA	CRISIL AA/Stable
INE118D07120	Non Convertible Debentures	30-Aug-19	9.15	30-Aug-22	350.0	Simple	CRISIL AA/Stable
INE118D08052	Perpetual Non Convertible Debentures	6-Jul-17	9.65	6-Jul-77	300.0	Highly Complex	CRISIL AA-/Stable
INE118D08045	Perpetual Non Convertible Debentures	6-Jul-17	10.15	6-Jul-77	300.0	Highly Complex	CRISIL AA-/Stable
INE118D07179	Non Convertible Debentures	25-Sep-20	7.25	25-Sep-23	500.0	Simple	CRISIL AA/Stable
NA	Non Convertible Debentures$	NA	NA	NA	350.0	Simple	CRISIL AA/Stable

^ FB limits are Interchangeable with NFB limits of 235 cr with LC

# Fund Based limits are Interchangeable with Non Fund Based limits.

^^ FB limits are Interchangeable with NFB limits of Rs.50 cr with LC

$ yet to be placed