Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities and debt instrument of Nuvoco Vistas Corporation Limited (NVCL) to ‘Stable’ from ‘Negative’ while reaffirming the CRISIL AA/CRISIL AA-’ rating and has reaffirmed its ‘CRISIL A1+' rating on the short-term bank facilities and commercial paper. CRISIL Ratings has also withdrawn its rating on the non-convertible debentures (NCDs) Rs.1700 crore and term loan Rs.145 Crore, as they have been redeemed based on the independent confirmation and as per the withdrawal policy.

 

The rating action follows the expected improvement in the financial risk profile of NVCL and financial flexibility with the Nirma group on account of ongoing deleveraging from the proceeds received with the initial public offer (IPO) of NVCL.

 

The group has raised about Rs 5,000 crore in the IPO which includes offer for sale (OFS) of ~ Rs. 3500 crore and fresh equity issuance of ~ Rs. 1500 crore. While the proceeds from the OFS will be primarily utilised for debt reduction at Nirma Ltd (rated CRISIL AA/AA-/Negative/CRISIL A1+) and Niyogi Enterprises Pvt Ltd (NEPL rated CRISIL AA-/Negative), NVCL plans to repay Rs 1,350 crore of external debt from the Rs. 1,500 crore proceeds received through fresh equity issuance.

 

NVCL acquired Nu Vista Ltd (NVL, formerly known as Emami Cement Ltd) in early fiscal 2021, following which the leverage went up to fund 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. With the planned debt reduction and accruals, CRISIL Ratings expects reduction in the leverage levels to ~ 2.2 times by end of fiscal 2022.

 

The company also benefits from its strong market position in Eastern India, diversification in North India and sound operating efficiency with above-average per tonne operating profitability; this is expected to improve the cash flow. Cost optimisation initiatives (including the setting up of captive power plants [CPP], waste heat recovery systems [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 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 is a leading cement player in eastern India, with installed capacity (NVCL+ NVL) market share of 15-16%. Earlier, NVCL was operating at about 95% utilisation, which would have constrained growth given the favourable demand in the eastern market. Following the acquisition, the market position of NVCL has improved, with overall capacity of 23-24 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 will complement the plants of NVCL in the eastern region.

 

Furthermore, in the northern region NVCL has an integrated plant in Chittogargh, a split blending unit in Haryana and an integrated unit in Nimbol (transferred from Nirma to NVCL in fiscal 2020). 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 is in the process of setting up CPPs and WHRSs, which are expected to be completed in fiscal 2022. 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 this acquisition, NVCL received 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. NVCL shall also benefit from dual brand positioning, with NVL products in category B and NVCL products in category A, wherein NVCL brands command a premium of Rs 20-25 per bag compared with NVL brands in the trade segment. In fiscal 2021, NVCL and NVL achieved volume of about 17.3 MTPA (considering NVL volume for full fiscal 2021), similar to fiscal 2020 levels; however, lower absorption of fixed cost and realisations impacted the margins. CRISIL Ratings expects demand recovery to be faster in the eastern region, which shall support revenue.

 

• Healthy operating efficiency

Operating efficiency has been strong, with above-average profitability per tonne, driven by sales of only blended cement, premium commanded by strong brands and use of competitively sourced power, slag and fly ash.

 

However cash flow witnessed moderation in fiscal 2021 on account of lockdowns to contain the Covid-19 pandemic. Production facilities operated at lower capacity utilisation because of lockdowns, supply and demand constraints. Demand loss in the first quarter of fiscal 2021 led to lower absorption of fixed cost which along with lower realisations impacted margins.

 

In current fiscal, with less restricted lockdowns, revenue is expected to be supported by healthy demand from the eastern region. Also with completion of the capital expenditure (capex; CPP and WHRS), reliance on an external power source shall reduce, leading to considerable savings in cement production cost from fiscal 2022 onwards. Furthermore, NVCL plans to improve operational efficiency (earnings before interest, taxes, depreciation and amortisation [EBITDA] per tonne) of NVL plants by product premiumisation, logistics and cost synergies. While the synergies realisation has been lower than expected because of stabilisation risk and pandemic-led issues, they are expected to be realised in the near to medium term. In fiscal 2022, while operating margin is expected to be impacted by rising cost; these synergies and benefits from cost rationalisation initiatives undertaken by NVCL will help cushion the sharp fall in the margin and improve EBITDA/T

 

• Healthy financial flexibility

NVCL enjoys healthy financial flexibility being part of the Nirma group; it is strategically important to the group and, hence, financial oversight from the group would continue. While there is financial flexibility, internal cash accrual and refinancing of the debt of NVCL will remain the primary source of funding for its capex and debt repayment. Moreover, NVCL will continue to evaluate various fundraising options to meet its funding requirement.

 

The group has raised about Rs 5,000 crore through IPO/OFS. Of this, Rs 1,350 crore shall be used towards debt reduction in NVCL and the remaining would be partially used towards external debt reduction in Nirma and NEPL, which shall improve the financial flexibility of the group. Any change in the strategic importance of NVCL to the group or delay in the deleveraging plan will be key rating sensitivity factors.

 

Weaknesses:

• Financial risk profile - To improve with deleveraging from IPO 

NVCL acquired Nu Vista Ltd (NVL, formerly known as Emami Cement Ltd) in early fiscal 2021, following which the leverage went up to fund 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. With the planned debt reduction and accruals, CRISIL Ratings expects reduction in the leverage levels to ~ 2.2 times by end of fiscal 2022.

 

In the past, the financial risk profile had been constrained because of the debt-funded acquisition, which resulted in net debt to EBITDA ratio of over 4.8 times as on March 31, 2017. The leverage gradually improved to 2.4 times as on March 31, 2020, supported by strong operations and improvement in realisations. With the acquisition, while leverage has increased to above 4 times, it is expected to correct to about 2.2 times by the end of fiscal 2022 through the proceeds from the IPO and internal accruals.

 

NVCL has planned capex of more than Rs 1,500 crore over the next 2 years till fiscal 2023. 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. Improved profitability of merged assets, through operational synergies and superior brand positioning, should benefit the company. Also, consolidated cash accrual is likely to increase over the medium term, backed by cost initiatives (including the setting 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

The cement facilities of NVCL are primarily in eastern India, which has seen relatively low price volatility and healthy demand in the past. However, realisations and profitability are constrained by demand, supply, sales and other regional factors. Moreover, susceptibility to fluctuations in the price of inputs, including raw material, power, fuel and freight, persists. In addition, the margin will remain sensitive to cyclicality in the cement industry.

Liquidity: Strong

Liquidity is strong, backed by the financial flexibility derived from being a part of the Nirma group and 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 1,500 crore. Company has drawing power of Rs 450 against the working capital lines and cash and equivalents of about Rs 130 crore which also support liquidity. The company is likely to generate EBITDA of Rs ~4,500 crore over the two fiscals through fiscal 2023 against debt obligation of more than Rs 3,000 crore over the said period.

Outlook: Stable

NVCL will continue to benefit from its healthy market position, robust operating efficiency and strong liquidity.

Rating Sensitivity factors

Upward factors

• Sustained increase in cash accrual, supported by improvement in operational efficiency and realisation of synergies
• Reduction in debt levels resulting in net debt to EBITDA ratio of less than 1.5 times on a sustained basis
• Substantial improvement in financial flexibility of Group with significant debt reduction across group companies

 

Downward factors

• Delay in improvement in net debt to EBITDA ratio to close to 2.5 times by March 31, 2022, primarily because of:

* Delay in realisation of synergies from the acquisition

* Lower-than-expected ramp-up in cash accrual as a result of inability to fully pass on cost increases to customers or delay in receipt of benefits from CPP and WHRS implementation

• Significant debt-funded growth plans

About the Company

NVCL manufactures cement and has installed capacity of 23-24 MTPA on consolidated basis. It operates around 49 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	2021	2020#
Revenue	Rs crore	7441	6787
Reported profit after tax (PAT)	Rs crore	-26	249
PAT margin	%	-0.3	3.7
Adjusted debt/adjusted networth	Times	1.4	0.8
Interest coverage	Times	2.2	3.2

#standalone

*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	Simple	CRISIL A1+
NA	Cash Credit & Working Capital Demand Loan^@#	NA	NA	NA	505	NA	CRISIL AA/Stable
NA	Working Capital Demand Loan$##	NA	NA	NA	125	NA	CRISIL AA/Stable
NA	Letter of credit & Bank Guarantee *	NA	NA	NA	120	NA	CRISIL A1+
NA	Term Loan	Sep-19	NA	Sep-23	150	NA	CRISIL AA/Stable
NA	Term Loan	Sep-19	NA	Sep-24	150	NA	CRISIL AA/Stable
NA	Term Loan	Sep-19	NA	Jun-25	150	NA	CRISIL AA/Stable
NA	Term Loan	Sep-18	NA	Sep-25	375	NA	CRISIL AA/Stable
NA	Term Loan	Dec-18	NA	Dec-25	375	NA	CRISIL AA/Stable
NA	Term Loan	Jul-20	NA	Jul-30	1000	NA	CRISIL AA/Stable
NA	Term Loan	July-20	NA	Dec-23	145	NA	Withdrawn
INE118D07120	Debentures	30-Aug-19	9.15	30-Aug-22	350	Simple	CRISIL AA/Stable
INE118D08052	Perpetual non-convertible debentures	6-Jul-17	9.65	6-Jul-77	300	Highly Complex	CRISIL AA-/Stable
INE118D08045	Perpetual non-convertible debentures	6-Jul-17	10.15	6-Jul-77	300	Highly Complex	CRISIL AA-/Stable
INE118D07179	Non-convertible debentures	20-Sep-20	7.25%	25-Sep-23	500	Simple	CRISIL AA/Stable
INE118D07187	Non-convertible debentures	30-Mar-21	6%	31-Mar-22	400	Simple	CRISIL AA/Stable
INE118D07153	Non-convertible debentures	1-Jul-20	8.75	15-Sep-21	215	Simple	CRISIL AA/Stable
INE118D07161	Non-convertible debentures	1-Jul-20	8.75	25-Mar-22	185	Simple	CRISIL AA/Stable

^Interchangeable with bank guarantee/letter of credit

*Full interchangeable with bank guarantee and letter of credit

$Interchangeble towards Bank Guarantee upto Rs. 30 crore

#Interchangeable towards Letter of Credit upto Rs.50 crore

@Limits interchangeable with bank guarantee / letter of credits up to Rs 50 crore

##Interchangeable with bank guarantee

 

Annexure - Details of instruments withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels
INE118D07146	Non-convertible debentures	18-Jun-20	8.5	9-Jul-21	650.00	Complex
INE118D07138	Non-convertible debentures	11-Jun-20	8.5	9-Jul-21	800.00	Simple
NA*	Non-convertible debentures	NA	NA	NA	250.00	NA

*yet to be issued