Rating Rationale
September 08, 2020 | Mumbai
R.A.K. Ceramics India Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.311.3 Crore
Long Term Rating CRISIL BBB+/Negative (Reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of R.A.K. Ceramics India Private Limited (RAK) at 'CRISIL BBB+/Negative/CRISIL A2'.
 
Operating performance should remain under pressure in calendar year 2020 due to the impact of the Covid-19 pandemic on end-user demand. Revenue is expected to decline by around 16% over 2019 and net losses should remain at the 2019 level. Despite the weak performance, cash flows have benefited from the Rs 50 crore equity received from the parent, RAK Ceramics P J S C (RAK UAE), in February 2020. Further funding support, by way of a Rs 90 crore loan from the parent is expected in the current year; this will be utilised to replace higher cost bank borrowing.
 
The company is focusing on improving standalone profitability by optimising the product mix and through various cost-cutting measures such as reducing employee costs, traveling costs and other fixed costs. Besides, ramping up of operations in the joint ventures (JVs), GRIS Ceramics LLP (Gris; commenced in 2018) and Gryphon Ceramics Pvt Ltd (Gryphon; 2019) will support revenue growth in 2021 and also enable significant improvement in profitability as these entities have operating margins of 13-15% and 23-25%, respectively, supported by their locational advantages. Consolidated revenue should grow by 15-20% per fiscal in the medium term and the operating margin improve to 7-9%.
 
The ratings continue to reflect an established market position and brand in the vitrified tiles and sanitary ware segments in India, and the strong operational, business, and financial support received from the parent, RAK UAE. 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 to end-user cyclicality.

Analytical Approach

For arriving at its ratings, CRISIL has combined 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 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, 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 2019, RAK UAE had revenue of Emirati dirham (AED) 260 crore (equivalent to about Rs 5,291 crore) with an operating margin of 16.4%. The gearing was 0.7 time as on December 31, 2019.
 
Financial support has been forthcoming from the parent -- RAK UAE ' who infused Rs 50 crore equity and is expected to extend loans of Rs 90 crore in 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 the 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 2019, RAK is estimated to have generated Rs 80-100 crore of its revenue from exports to the parent.
 
* Established market position and brand in the vitrified tiles and sanitary ware segments in India
The company 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 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 in 2020 and set up more showrooms to sell high-margin products.  While RAK 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
* 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 ('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 had 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 affected 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 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 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 operating margin was impacted during 2011 and 2012, as it resorted to liquefied petroleum gas for fuel requirement 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. The networth is estimated to have declined to around Rs 227 crore as on December 31, 2019, from Rs 270 crore as on December 31, 2017, and the gearing to have increased to 1.43 times as on December 31, 2019, from 0.93 time as on December 31, 2018. Continued losses in 2020 will also result in average debt protection metrics. However, timely financial support from the parent in the form of Rs 50 crore equity and Rs 90 crore loan expected in the current year should support the 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, the credit metrics should remain moderate.
Liquidity Adequate

RAK has adequate liquidity available to it, driven by expectation of ongoing as well as need-based support from the parent. On a standalone basis, RAK has stretched liquidity as a cash loss is expected in 2020. However, parent funding and unutilised bank lines should support liquidity. The company has access to a fund-based limit of Rs 250 crore, utilised at an average of 75-80% during the 12 months through April 2020. The unutilised limit was around Rs 50 crore and cash and equivalents were Rs 10-12 crore, as on August 31, 2020. RAK and its JVs have long-term repayment obligation of around Rs 19 crore and Rs 34 crore per year in 2020 and 2021, and capital expenditure (capex) plans of Rs 40-60 crore in 2020. Unutilised bank lines and parent funding support should be sufficient to meet repayment obligation as well as incremental working capital requirement over the medium term.

Outlook: Negative

CRISIL believes cash generation will remain subdued and recover only gradually over the medium term, most likely supported by benefits of various cost cutting measures, ramp up in operations of the subsidiaries and recovery of demand in 2021.
 
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 the financial risk profile either through larger-than-expected equity infusion by the parent or higher cash generation from operations
 
Downward Factors
* A decline in revenue, or the operating margin remaining below 5-6% on a sustained basis
*Slower-than-expected ramp-up in JVs and their contributions, leading to higher losses
* Further deterioration in credit metrics
* Change in stance of support by the parent
* Moderation in the credit risk profile of the parent.

About the Company

Incorporated in March 2004, RAK is a wholly owned subsidiary of RAK UAE. 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, Andhra Pradesh.
 
In 2017, RAK entered into two JVs, Gris and Gryphon. Gris manufactures regular sized vitrified tiles for floors and walls whereas Gryphon manufactures large slabs used primarily in commercial establishments. These companies sell 100% to RAK.
 
In 2010, the company commenced trading in tiles and sanitary ware, which are marketed under its reputed RAK brand. Trading contributed 45% to revenue in 2019.
 
About the Parent
RAK UAE 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 UAE from the ruling family of Ras Al Khaimah, which still maintains a significant holding in the business.
 
In 2019, RAK UAE had a net profit of AED 20 crore (equivalent to about Rs 407 crore) on revenue of AED 260 crore (around Rs 5,291 crore).

Key Financial Indicators (Consolidated)
Particulars Unit 2019* 2018
Revenue Rs.Crore 663 610
Profit After Tax (PAT) Rs.Crore (54) (31)
PAT Margin % -8.1 -5.1
Adjusted debt/adjusted networth Times 1.43 0.93
Interest coverage Times 0.84 0.13
*Provisional
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 and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Complexity level Rating Assigned with Outlook
NA Cash Credit@ NA NA NA 250.0 NA CRISIL BBB+/Negative
NA Letter of Credit and Bank Guarantee NA NA NA 58.5 NA CRISIL A2
NA Long Term Loan* NA NA Jul-2020 2.8 NA CRISIL BBB+/Negative
@Interchangeable with packing credit/buyer's credit/export bill discounting and working capital demand loan.
*The company had taken moratorium for the long term loan and the revised maturity date is awaited from the banker.
 
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  07-02-20  CRISIL BBB+/Negative      31-10-18  CRISIL BBB+/Stable  04-07-17  CRISIL A-/Negative  CRISIL A-/Stable 
        31-01-20  CRISIL BBB+/Negative          07-03-17  CRISIL A-/Negative   
Non Fund-based Bank Facilities  LT/ST  58.50  CRISIL A2  07-02-20  CRISIL A2      31-10-18  CRISIL A2  04-07-17  CRISIL A2+  CRISIL A2+ 
        31-01-20  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 Cash Credit@ 250 CRISIL BBB+/Negative
Letter of credit & Bank Guarantee 58.5 CRISIL A2 Letter of credit & Bank Guarantee 58.5 CRISIL A2
Long Term Loan 2.8 CRISIL BBB+/Negative Long Term Loan 2.8 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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