Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB+/Stable/CRISIL A2’ ratings on the bank facilities of R.A.K. Ceramics India Pvt Ltd (RAK India).

 

The ratings continue to reflect an established market position and brand in the vitrified, ceramic tiles and sanitary ware segments in India, and the strong operational, business, and financial support received from the parent, RAK UAE PJSC. The company has recorded a decline in operating income of ~10% to about Rs 867 crore in 2023 from the previous year, owing to moderation in demand from stiff competition in key export and domestic markets leading to drop in volume and realisation. Operating profitability witnessed a slight moderation at 7.2% in 2023 as compared to 7.9% in previous year owing to higher overheads amid low realisation. Going forward, the company is expected to record healthy growth in operating income by 5-6% with steady operating profitability  over the medium term backed by a focus on improved product mix towards glazed vitrified tiles (GVT) and pickup in demand from export markets. RAK India is adequately supported by the parent, RAK Ceramics PJSC (RAK UAE), which extended corporate guarantee to the term loans availed by RAK India and its joint venture (JV) partners.

 

Debt protection metrics stood average, with the interest coverage ratio to 3.23 times in 2023 while the net cash accrual to total debt (NCATD) ratio marginally rose to 0.24 time from 0.23 time previously. Prior period losses have led to erosion in the networth, however, stood adequate at around Rs 241 crore as on December 31, 2023. Gearing has improved from highs of 1.71 times since 2021(0.68 times as on Dec’2023) is expected to remain stable over the medium term. Unutilised bank lines to the tune of Rs 30-40 crore and adequate cash generated from the business should comfortably meet repayment obligations and the incremental working capital requirement.

 

RAK India is also planning to undertake a capital expenditure (capex) of Rs 100-150 crore in the next couple of years to augment its presence in the ceramic/vitrified tile industry. This is expected to be funded by a mix of debt and equity.

 

These strengths are partially offset by an average financial risk profile, vulnerability to fluctuations in fuel cost and raw material prices, and exposure to intense competition and end-user cyclicality.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profile of RAK India, GRIS Ceramics LLP (Gris) and Gryphon Ceramics Pvt Ltd (Gryphon) and Totus Ceramics. Gris and Gryphon are JVs with 51% stake from RAK India and Totus Ceramics is a 100% subsidiary of RAK India.

 

CRISIL Ratings has also factored in the strong operational, business, and financial support received from the parent, RAK UAE.

 

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 operational, business, and financial support from the parent: RAK India, being a subsidiary of RAK UAE, continues to benefit from the parent’s established market presence in addition to business and financial support. The parent is one of the world's largest ceramics manufacturers with a reputed name in the industry. In 2023, RAK UAE had revenue of Emirati dirham (AED) 3.45 billion (equivalent to about Rs 7,926 crore) with an operating margin of 17.9%. Gearing was 0.76 time as on December 31, 2023.

 

Financial support has been forthcoming from the parent – RAK UAE – who infused Rs 50 crore equity in 2020 and has extended corporate guarantee to the term loan of RAK India. In 2013, RAK UAE converted Rs 137 crore of loan to equity, thus strongly benefiting RAK India’s capital structure. Further, the parent invested Rs 45 crore in 2017 for investment in JVs. Moreover, most of the personnel from the senior management team have been deputed by the parent. RAK India also receives continuous support from the parent in terms of technology and launching of new products.

 

The parent also extends operational support by procuring tiles from its Indian counterpart in case of any inventory build-up and slowdown in the domestic market.

 

• Established market position and brand in the vitrified tiles and sanitary ware segments in India: RAK India commenced commercial operations in June 2006. Its market position is driven by the established presence of RAK UAE in the vitrified tiles industry spanning over two decades. Within the short span of 10 years, RAK India has stabilised its operations and become a leading player in the organised ceramics market in India and has set up a marketing network of over 400 dealers. The company is planning to expand its network in India and set up more showrooms to sell high-margin products.  While RAK India is a reputed brand, particularly in the premium segment, the ceramic tiles industry is highly competitive and renders the company susceptible to competitive pressures during down cycles.

 

Weaknesses:

• Average financial risk profile: The financial risk profile remained moderated due to decline in profitability and continued net losses since 2016. Subsequently, networth declined to Rs 241 crore as on December 31, 2023, from Rs 250 crore as on December 31, 2022. That coupled with relatively high debt profile, comprising primarily of short-term debt, kept the gearing high at 0.68 times as on December 31, 2023. Similarly, debt protection metrics were comfortable, with interest coverage ratio at 3.23 times and NCATD ratio at 0.24 time for calendar year 2023. Any improvement in the profitability should boost the overall financial risk profile and remain a monitorable.

 

• Exposure to intense competition: The ceramic tiles industry is highly competitive and dominated by the unorganised sector, which has a market share of around 50%. Additionally, companies face competitive pressure from low-cost Chinese imports. Also, in the organised segment, RAK India faces intense competition from other reputed players such as H&R Johnson (India) Ltd, Somany Ceramics Ltd (‘CRISIL AA-/Stable/CRISIL A1+’), Kajaria Ceramics Ltd, and Asian Granito India Ltd. The ability to command a premium in the market will depend on the competitive advantage that RAK India derives from RAK UAE's expertise in this business.

 

• Exposure to cyclicality in the end-user industry: The fortunes of the tiles industry are driven by the real estate market and the economic scenario. For instance, the tiles industry had modest growth since fiscal 2018 due to slowdown in the real estate market. Even during fiscal 2017, post demonetisation, the real estate sector was impacted, which in turn affected demand for the tiles industry. RAK India is likely to remain susceptible to cyclicality in demand from the major end-user industry, real estate.

 

• Vulnerability to fluctuations in fuel cost and raw material prices: The ceramics industry is highly power intensive; power cost constitutes up to 20% of the total cost depending on the type of fuel used for the manufacturing process. Consequently, most of the industry players have manufacturing operations in Morbi, Gujarat, which has adequate low-cost fuel in terms of natural gas to power the plants. However, RAK India, with its manufacturing plant in Andhra Pradesh, is exposed to shortage of natural gas to power its plants. However, RAK India entered into JVs based in Morbi – Gris and Gryphon -- to take advantage of the proximity to raw materials and access to fuel. Besides, given the competition, players also remain vulnerable to any steep fluctuations in prices of key raw materials (clay, feldspar, silica, kaolin, and carbonates).

Liquidity: Adequate

Liquidity is expected to be adequate with cash accruals in the range of Rs 60-70 crore in 2024, against debt obligation of Rs 22-25 crore and capex of ~Rs 15-20 crore. Further, the bank limit of Rs 205 crore was utilised at around 72% for the 12 months ended March 2024. Planned capex of Rs 100-150 crore in 2024-25 is expected to be funded prudently through debt and equity. Improved cash generation, unutilised bank lines and need-based parent support should be sufficient to meet repayment obligations as well as incremental working capital requirements over the medium term.

Outlook: Stable

The business profile of RAK India would continue to benefit, with revival in demand in the core business segment, resulting in increase in scale of operations. Also, cost-rationalisation measures undertaken by the company improved operating efficiency, which would lead to higher cash generation and stronger debt protection metrics.

Rating Sensitivity Factors

Upward factors

• Sustained healthy revenue growth and operating profitability steady at 9-10%, resulting in steady  cash generation of over Rs 90-100 crore per annum.
• Significant improvement in the financial risk profile, and debt protection metrics, either through large equity infusion by the parent or higher cash generation from operations.
• Improvement in the credit risk profile of the parent.

 

Downward factors

• Sluggish revenue growth or the operating margin remaining below 5% on a sustained basis, leading to insufficient cash generation to meet repayment obligations.
• Deterioration in the overall financial risk profile due to material debt-funded capex or acquisition or stretch in the working capital cycle.
• Change in stance of support by the parent and moderation in the credit profile of the parent.

About the Company

Incorporated in March 2004, RAK India is a wholly owned subsidiary of RAK UAE. The company manufactures vitrified/ceramic tiles and sanitary ware in India. As on December 31, 2023, it had capacity to manufacture 4.5 lac square metre of tiles and 2,000 pieces of sanitary ware per annum. It uses the latest dry-powder-pressed technology at its plant at Samalkot in Andhra Pradesh.

 

In 2017, RAK India entered into two JVs – Gris and Gryphon. Gris manufactures regular sized vitrified/ ceramic tiles for floors and walls whereas Gryphon manufactures large slabs used primarily in commercial establishments. These companies sell 100% to RAK India.

About the parent (RAK UAE)

RAK UAE is a public-listed company, established in 1991 by the royal family of Ras Al Khaimah. It is part of an approximately USD 1-billion global conglomerate that supplies ceramic products to over 160 countries and is one of the world’s largest ceramics manufacturers with a global annual production output of 118 million square meter of ceramic and porcelain tiles, 5 million pieces of bathroom ware, and 36 million pieces of tableware and 2.6 mn pieces of faucets and taps.

 

In July 2014, investment firm, Samena Capital, through its subsidiary, Samena Limestone Holdings, and its consortium of international investors, including two Gulf sovereign wealth funds, acquired 30.6% stake in RAK UAE from the ruling family of Ras Al Khaimah. On May 2021, Samena Capital sold 17.6% stake in RAK UAE to Falcone Investments LLC for which the shareholding reached 20.4%.

Key Financial Indicators (Consolidated)

Particulars	Unit	2023	2022
Operating income	Rs.Crore	867	951
Profit after tax (PAT)	Rs.Crore	2	18
PAT margin	%	0.3	1.9
Adjusted debt/adjusted networth	Times	0.68	0.97
Interest coverage	Times	3.23	3.39

Note: The financial reporting is from January to December

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 levels	Rating assigned with outlook
NA	Cash credit@	NA	NA	NA	205	NA	CRISIL BBB+/Stable
NA	Letter of credit and bank guarantee	NA	NA	NA	43.5	NA	CRISIL A2
NA	Rupee term loan	NA	NA	Oct-2025	40	NA	CRISIL BBB+/Stable

@Interchangeable with packing credit/buyer's credit/export bill discounting and working capital demand loan.