Rating Rationale
February 07, 2020 | Mumbai
R.A.K. Ceramics India Private Limited
 
Rating Action
Total Bank Loan Facilities Rated Rs.311.3 Crore
Long Term Rating CRISIL BBB+/Negative
Short Term Rating CRISIL A2
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL ratings on the bank facilities of R.A.K. Ceramics India Private Limited (RAK) continue to reflect the company's established market position and brand in the vitrified tiles and sanitary ware segments in India, and the strong operational, business, and financial support it receives from parent RAK UAE. These strengths are partially offset by average financial risk profile, vulnerability to fluctuations in fuel cost and raw material prices, and exposure to intense competition and end-user cyclicality
 
On January 31, 2020, CRISIL revised its outlook on the long-term bank facilities of R A K  Ceramics India Pvt Ltd (RAK) to 'Negative' from 'Stable' while reaffirming the ratings on RAK's bank facilities at 'CRISIL BBB+/CRISIL A2'.
 
The outlook revision follows a belief that RAK's operating performance will remain subdued in the near term, marked by lower profitability and modest cash generation in-turn impacting key credit metrics. While revenue for 2019 (refers to calendar year, January 1 to December 31) is estimated to grow by 5-7%, operating profitability may remain subdued at 3-5%. Slowdown in the real estate industry, competition, incommensurate realisations compared with cost of production, and liquidation of excess inventory for lower prices have all impacted margins. Besides, sub-optimal capacity utilisations at the Samalkot plant in Andhra Pradesh (50% for the sanitary ware unit and 67% for the tile manufacturing unit) also constrained profitability. Earlier in 2018, operating margin declined steeply to (1.1)% from 6.9% in the previous year and revenue remained flat at Rs 610 crore leading to net losses.
 
As manufacturing operations at Samalkot continue to face pressure from high cost of production and challenging market conditions, net losses are likely to continue in the near term. However, the newly operational joint ventures (JVs) namely GRIS Ceramics LLP (Gris; commenced in 2018) and Gryphon Ceramics Pvt Ltd (Gryphon; commenced in 2019) are ramping up at a steady pace with operating profitability of 13-15% and 23-25%, respectively, supported by their locational advantages. As the JVs scale up further in addition to various cost improvement measures planned at the standalone operations, RAK's profitability should gradually improve over the medium term.
 
While the credit metrics have been impacted by weak margins, funding support from the parent, RAK Ceramics P J S C (RAK UAE), continues to support financial risk profile. RAK is expected to receive equity of Rs 50 crore and parent loan of Rs 90 crore by March 2020.

Analytical Approach

For arriving at its ratings, CRISIL has consolidated the business and financial risk profile of RAK, Gris and Gryphon. Further CRISIL has also factored in the strong operational, business, and financial support received from the parent RAK UAE.

Please refer Annexure - Details of Consolidation, 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, 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 and renowned name in the industry. In 2018, RAK UAE generated revenue of AED 282 crore (equivalent to approximately Rs 5,468 crore) with operating margin of 14.8%. The capital structure as reflected in gearing of 0.68 time as on December 31, 2018.
 
Financial support has been forthcoming from the parent -- RAK UAE ' who is expected to infuse Rs 50 crore equity and loans of Rs 90 crore by March 2020. In 2013, RAK UAE converted Rs 137 crore of loan to equity, thus strongly benefiting RAK's capital structure. Further, the parent infused Rs 45 crore in 2017 for investment in JVs. Moreover, most of the personnel from RAK's senior management team have been deputed by the parent. RAK 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. In CY2019, RAK is expected to generate Rs 80-100 crore of its revenue from exports to parent.
 
* Established market position and brand in the vitrified tiles and sanitary ware segments in India
RAK commenced commercial operations in June 2006. Its market position is driven by the established presence of RAK UAE in the vitrified tiles industry (the parent has been in the industry for two decades). Within the short span of 10 years, RAK 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. RAK is planning to expand its network in India in 2020 and set up more showrooms to sell high-margin products.  While RAK is a renowned brand, particularly in the premium segment, ceramic tiles industry is highly competitive and renders the company susceptible to competitive pressures during down cycles.
 

Weaknesses
* 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 faces intense competition from other reputed players such as H&R Johnson (India) Ltd, Somany Ceramics Ltd (rated '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 derives from RAK UAE's expertise in this business.
 
* Exposure to cyclicality in the end-user industry
Fortunes of the tiles industry are primarily driven by the real estate market and the economic scenario. For instance, the tiles industry reported modest growth in 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 impacted demand for the tiles industry. RAK 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 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 and is also in proximity to raw materials. However, RAK with its manufacturing plant in Andhra Pradesh is exposed to shortage of natural gas to power its plants. For instance, the margins were impacted during 2011 and 2012, as it resorted to liquefied petroleum gas for its fuel requirements in the absence of natural gas supply. Besides, given the competition, players also remain vulnerable to any steep fluctuations in prices of key raw materials (clay, feldspar, silica, kaolin, and carbonates).
 
* Average financial risk profile
The financial risk profile has moderated due to the decline in profitability and continued net losses in 2018 and 2019. Networth is estimated to decline to less than Rs 200 crore as on December 31, 2019 compared to Rs 270 crore as on December 31, 2017 and gearing is estimated to increase to over 1.60 times as on December 31, 2019 compared to 0.93 time as on December 31, 2018. Besides, debt protection metrics are also average. However, timely financial support from the parent in the form of Rs 50 crore equity and Rs 90 crore loan expected by March 2020, should support capital structure. Besides, with improving contribution from the JVs, profitability, cash generation, and thus debt protection metrics are also expected to improve gradually over the medium term. Nevertheless credit metrics will remain moderate.
Liquidity Adequate

RAK has adequate liquidity available to it, driven by expectation of support from the parent - RAK UAE - to provide ongoing and need-based support, in case of exigencies. On a standalone basis, RAK has stretched liquidity. The company is expected to generate cash accrual of Rs 28-40 crore per annum in 2020 and 2021 and had cash and cash equivalents of Rs 22 crore as on December 31, 2018. RAK also has access to fund-based limit of Rs 250 crore, utilised at an average of 75-80% during the 12 months through September 2019. RAK and its JVs have long-term repayment obligation of around Rs 23 crore and Rs 34 crore each in 2020 and 2021, respectively, and capital expenditure (capex) plans of Rs 60-70 crore in 2020. CRISIL expects internal accrual, cash & cash equivalents, and unutilised bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirement. Besides, need-based financial support is expected to be forthcoming from the parent.

Outlook: Negative

CRISIL believes RAK's cash generation will remain subdued and will recover only gradually over the medium term, most likely supported by better demand in the real estate industry, better utilisation of capacities in the Samalkot facility, ramp up in the operations of the subsidiaries and launch of new products/designs.
 
Rating sensitivity factors
Upward factors
* Sustained improvement in the operating margin and healthy revenue growth, resulting in a substantial increase in cash accrual to over Rs 30 crore per annum
* Significant improvement in financial risk profile either through larger-than-expected equity infusion by parent or higher cash generation from operations
 
Downward factors
* Decline in revenue or if operating margin falls below 3%, leading to higher-than-expected net losses
* Further deterioration in credit metrics due to higher losses or higher debt, resulting from increased capex or a stretch in the working capital cycle
* Change in stance of support by parent
* Moderation in credit risk profile of parent

About RAK
Incorporated in March 2004, RAK is a wholly owned subsidiary of RAK Ceramics P J S C. The company manufactures vitrified tiles and sanitary ware in India. As on December 31, 2016, it had capacity to manufacture 80.4 lakh square metre per annum of tiles and 3,000 pieces per day of sanitary ware. It uses the latest dry-powder-pressed technology at its plant at Samalkot.
 
In 2017, RAK entered into two JVs, namely Gris and Gryphon. Gris manufactures regular sized vitrified tiles for floors and walls whereas Gryphon manufactures large slabs used primarily in commercial establishments. Gris and Gryphon sells 100% to RAK India.
 
In 2018, Gris made an EBITDA of Rs 3 crore and profit after tax (PAT) of Rs 0.74 crore on a revenue of Rs 52 crore. Gryphon started production at the start of 2019.  
 
In 2010, RAK commenced trading in tiles and sanitary ware, which are marketed under its reputed RAK brand. Trading contributed 63% to revenue in 2018.
 
About the Parent
RAK Ceramics P J S C is a listed company, established in 1991 by the royal family of Ras Al Khaimah, United Arab Emirates. It is a part of a USD 1-billion (equivalent to Rs 7,123 crore) 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 of 11 crore square meter of tiles and 0.5 crore pieces of sanitary ware. In July 2014, the 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 PSC from the ruling family of Ras Al Khaimah, which still maintains a significant holding in the business.
 
In 2018, RAK Ceramics P J S C had a net profit of AED 22 crore (equivalent to approximately Rs 548 crore) on revenue of AED 282 crore (equivalent to approximately to Rs 5,470 crore).

Key Financial Indicators
Key financials (consolidated) Particulars Unit 2018 2017
Revenue Rs crore 610 616
Profit after tax Rs crore (31) (2)
PAT margin % -5.1 -0.4
Adjusted debt/adjusted networth Times 0.93 0.76
Interest coverage Times 0.13 2.82
Note: The financial reporting is from January to December

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Cr) Rating Assigned with Outlook
NA Cash Credit@ NA NA NA 250.0 CRISIL BBB+/Negative
NA Letter of Credit and Bank Guarantee NA NA NA 58.5 CRISIL A2
NA Long term loan NA NA July 2020 2.8 CRISIL BBB+/Negative
@Interchangeable with packing credit/buyer's credit/export bill discounting and working capital demand loan.
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
GRIS Ceramics LLP 100% Subsidiary with 51% ownership; Business linkages
Gryphon Ceramics Pvt Ltd 100% Subsidiary with 51% ownership; Business linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  252.80  CRISIL BBB+/Negative  31-01-20  CRISIL BBB+/Negative      31-10-18  CRISIL BBB+/Stable  04-07-17  CRISIL A-/Negative  CRISIL A-/Stable 
                    07-03-17  CRISIL A-/Negative   
Non Fund-based Bank Facilities  LT/ST  58.50  CRISIL A2  31-01-20  CRISIL A2      31-10-18  CRISIL A2  04-07-17  CRISIL A2+  CRISIL A2+ 
                    07-03-17  CRISIL A2+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit@ 250 CRISIL BBB+/Negative Buyer`s Credit 18 CRISIL BBB+/Negative
Letter of credit & Bank Guarantee 58.5 CRISIL A2 Cash Credit@ 211.9 CRISIL BBB+/Negative
Long Term Loan 2.8 CRISIL BBB+/Negative Letter of credit & Bank Guarantee 60.5 CRISIL A2
-- 0 -- Long Term Loan 12.5 CRISIL BBB+/Negative
-- 0 -- Rupee Term Loan 8.4 CRISIL BBB+/Negative
Total 311.3 -- Total 311.3 --
@Interchangeable with packing credit/buyer's credit/export bill discounting and working capital demand loan.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Mapping global scale ratings onto CRISIL scale

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