Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the commercial paper programme of Ramco Industries Ltd (RIL) at ‘CRISIL A1+’.

 

For the full year fiscal 2023, the revenues remained stable year-on-year despite 15% growth in domestic building products business due to decline in revenues of Sri Lankan subsidiary (12-15% of revenues) which witnessed a degrowth of 46% primarily due to economic slowdown in Sri Lanka which has impacted the demand. Profitability declined by ~450 bps y-o-y due to increase in asbestos fibre costs and modest performance of Sri Lankan subsidiary which records relatively higher profitability. Flexibility to pass on the prices has been impacted due to competitive intensity resulting in RIL absorbing portion of increased raw material cost. Further, the Textile segment’s( ~10% of revenues in fiscal 2023) performance has been impacted due to sluggish demand conditions in key markets such as USA and Europe.

 

For the half year ended September 30,2023, RIL’s revenues remained stable however the profitability declined by ~250 bps primarily due to impact of increased raw material costs. In the corresponding period last year, even though the raw material costs had gone up, the company had stock of low priced inventory which led to relatively better margins and the full impact of increased raw material costs has been reflected in the first half of present fiscal. Besides, the textile segment has been making operational losses due to modest export demand.

 

The demand for asbestos sheets is expected to remain steady with anticipated increase in rural income over the near to medium term and increased government push towards rural housing. However, the profitability for the full year is expected to moderate from fiscal 2023 levels due to elevated asbestos fibre prices and losses in textile segment. Increasing contribution of revenues from boards segment (~22% of total revenues in fiscal 2023) will partially mitigate the impact on margins as the boards segment commands higher margins. Overall, while demand growth is expected to be steady over the medium term, operating profitability is expected to range between 9-11%, mainly due to higher asbestos fibre costs, and lower pass-on of the same to customers, due to intense competition from substitute products.

 

RIL has been contemplating investing Rs.200 crores to set up a board plant in Madhya Pradesh and is expected to avail Rs.150 crores of debt for the project, which is expected to be delayed due to modest performance and uncertain market conditions. The project will increase the present board capacity by 40-50%. RIL’s financial risk profile is expected to remain healthy, post-factoring the additional project debt of Rs.150 crores due to a healthy balance sheet.

 

Working capital levels for RIL have increased with the company increasing the inventory levels of asbestos fiber stocks due to uncertainties in supply. Further there was a reduction in the creditors period as suppliers had sought for advance payments compared to earlier supplies based on LCs. While RIL managed to partially meet the increased working capital requirements by reducing the debtors by providing cash discounts, the short term debt increased to Rs.261 crores in fiscal 2023 from Rs.197 crores in fiscal 2022. The short term debt is expected to sustain at fiscal 2023 levels in the near term as well. However, despite the elevated short term debt, the debt protection metrics will remain healthy due to strong balance sheet and progressive repayment of long term debt. Also, the debt protection metrics, while moderating due to lower profitability, will remain healthy despite possibility of debt addition for the board project

 

The rating continues to reflect RIL’s established position in the domestic Asbestos Cement Sheets (ACS) roofing market and improving presence in the Sri Lankan market, and healthy revenue diversity through presence in textiles, calcium silicate boards, and wind power segments. The rating also considers the company’s adequate operating efficiencies, and its healthy financial risk profile, driven by steady cash accrual, prudent working capital management, and moderate expansion plans. The significant value of investments in listed Ramco group companies including The Ramco Cements Limited (RCL; rated ‘CRISIL A1+’) additionally supports RIL’s financial flexibility. These strengths are partially offset by dependence of AC roofing business on rural spending, availability and pricing of key raw material (asbestos fibre), exposure to intense competition from peers as well as from substitute steel products. The company is also exposed to regulatory risks on manufacture and usage of asbestos, as well as change in policies of key asbestos-producing nations, given that India imports its entire asbestos requirement.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of RIL and its subsidiaries, held directly or indirectly, as all the entities share a common management, operate in similar lines of business, and have significant operational and financial linkages. CRISIL Ratings considers these entities as being strategic to RIL in view of their strong integration with the company’s operations.

 

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:

• Established position in the domestic AC roofing market: RIL has been in the domestic AC roofing business for more than 50 years and is one of the four large players, which together account for about 75% of overall market share. A pan-India presence with manufacturing facilities across the four regions has helped entrench the ‘Ramco’ brand and also shield operations from regional demand-supply mismatches. The company has further expanded its market channels and distributor base for better market reach, especially in West India. It continues to leverage its brand equity for AC roofing products in Sri Lanka, where it is one of the leading players.

 

• Healthy revenue diversity and adequate operating efficiencies: While the domestic AC roofing business continues to be the mainstay, contributing around 65-70% to overall revenue during fiscal 2023, the company also manufactures cotton yarn and cement boards which does not use asbestos . AC roofing and boards comprise the building products division. Boards contributed ~22% of revenues of building products division in fiscal 2023 compared to 10% in fiscal 2016. Since 2017, the company has ventured into implementing turnkey projects for roofing solutions in India and Sri Lanka, which will provide additional opportunities for the future. Price competitiveness, stronger diversity in revenue, and improvement in the Sri Lankan unit has helped mitigate the slow momentum of demand in the domestic industry. CRISIL believes that improving revenue and segmental diversity should mitigate significant fluctuation in the company’s performance over the medium term.

 

• Healthy financial risk profile: RIL's financial risk profile is marked by healthy networth and improved debt protection metrics. The adjusted gearing (including guarantees provided to group companies) was healthy at 0.26 times as on March 31, 2023 (against 0.21 times at March 31, 2022), while adjusted debt to earnings before interest tax, depreciation and amortization (EBITDA) stood at 1.91 times in fiscal 2023 (0.97 times in fiscal 2022). The net cash accrual to total debt and interest coverage ratios also remains healthy at about 0.42 time and 8.44 times, respectively, in fiscal 2023 as compared to 0.65 time and 26.99 times, respectively, in fiscal 2022. The ratio of total outside liabilities to total networth (TOL/TNW) is healthy at <0.5 times for fiscal 2023.

 

Cash generation remains healthy at Rs.90-120 crores despite the expected moderation in operating profitability to 9-11% over the near to medium term.  Debt metrics, however, are expected to moderate but still remain healthy due to additional debt for higher inventory levels and lower profitability. Also, the guarantee given to group entity has been discharged as the entity has merged with another group entity. RIL does not have any outstanding guarantees to other group entities. Nevertheless, this would remain a key monitorable.

 

• Financial flexibility supported by investments in Ramco group companies and being a leading company of the group: RIL is the second-largest company in the Ramco group after RCL and enjoys a strong relationship with the lending community, allowing it to raise low-cost debt. Its large portfolio of investments in listed group entities, which is completely unpledged, was about Rs 5,364 crore (market value) as on December 7, 2023. Though these investments are strategic in nature, they lend a good amount of financial flexibility and support liquidity to offset any financial exigency. A moderate portion of the investments were divested during fiscals 2015 and 2016 to support cash flows and reduce debt.

 

Weakness:

• Exposure to regulatory threat of ban on manufacture or use of asbestos in end-user markets and in key asbestos-producing nations: As around 75% of revenue is generated from the sale of AC roofing, the company is exposed to the risk of a ban on mining and use of asbestos in Russia and Kazakhstan (which are the largest exporters of this mineral). Brazil and Canada, which were among the world's largest producers, have already banned the mining and sale of asbestos in 2017 and 2019, respectively. In India, only white asbestos (known as chrysotile) fibre is used, as blue and brown asbestos have been banned. Furthermore, all forms of asbestos mining are banned in the country. Russia-Ukraine war resulted in cost of asbestos fibre go up due to increased logistics costs and rupee depreciation. One of the suppliers in Brazil has been facing litigation issues in its state. Future movements in asbestos fibre, as well as  regulatory changes concerning asbestos mining and usage will remain  monitorables.

 

• Dependence on rural spending, and exposure to intense competition from peers and substitute products: Demand for AC roofing is derived from rural spending on household construction, as well as investment in industrial construction, thus exposing the company to rural purchasing power and economic cycles. It also faces stiff competition from peers given the modest growth and the presence of 19 players in the industry. Furthermore, AC roofing manufacturers face stiff competition from manufacturers of galvanized iron (GI) roofing sheets, which have emerged as a viable alternative for AC roofing. Any sharp decline in the price of GI sheets will impact demand for AC sheets.

 

Prices of raw materials for AC roofing (asbestos fibre and cement) increased over the past 10-12 months. The operating margin remains vulnerable to any further sharp price volatility or currency fluctuations. While the concentration risk has been mitigated by diversification into boards and steadily increasing presence in Sri Lanka, the AC sheet business in India will continue to remain the mainstay over the medium term and thus keep the company exposed to risks in the segment.

Liquidity: Strong

Liquidity remains strong driven by healthy cash accrual is of about Rs.90-120 crores per fiscal over the medium term. Average utilisation of working capital bank limit of Rs 655 crores was about 58% of the drawing power during the 12 months through September 2023. The company has annual long term repayment obligation of ~Rs 11-15 crores over the medium term. Capital expenditure to remain nominal around Rs 40 crore per fiscal towards modernization of facilities and maintenance . Cash accrual, cash surpluses(Rs.60 crores as on September 30,2023) and unutilized bank lines should be sufficient to meet funding requirements. With an adjusted gearing of 0.26 time as on March 31, 2023, there is sufficient headroom to raise additional debt. Liquidity is also supported by the significant value of investments in listed Ramco group companies.

Rating Sensitivity actors

Downward factors

• An extended material slowdown in demand for AC roofing resulting in considerable decline in RIL’s revenues.
• Sustained decline in operating margins to below 7-8% over the medium term,  due to continued increase in input prices or due to pricing pressure following challenging market conditions.
• Moderation in debt metrics due to large debt funded capex/acquisitions, increase in guarantees; for instance TOL/TNW of higher than 1.2-1.3 times on a sustained basis.
• Material decline in value of quoted investments, impacting financial flexibility.

About the Company

Incorporated in 1965, RIL was founded by Mr P R Ramasubrahmaneya Rajha, son of Mr P A C Ramasamy Raja, founder of the South India-based Ramco group. RIL manufactures AC roofing in both India and Sri Lanka and CSBs in the building products division, and also sells cotton yarn of 4-300s counts. It has 10 manufacturing facilities across India for the building products division, one facility in Rajapalayam, Tamil Nadu, for manufacture of cotton yarn; and four windmills at Tamil Nadu, Karnataka, and Gujarat.

 

The Ramco group includes RCL (formerly Madras Cements Ltd), Ramco Systems Ltd, and RIL. The textile companies in the group include Rajapalayam Mills Ltd ('CRISIL A/Positive/CRISIL A1'), Rajapalayam Textile Ltd ('CRISIL BBB/Stable'), Ramaraju Surgical Cotton Mills Ltd ('CRISIL A-/Positive/CRISIL A2+'), Sri Vishnu Shankar Mills Ltd ('CRISIL BBB+/Stable/CRISIL A2'), Sandhya Spinning Mills Ltd ('CRISIL BBB/Stable/CRISIL A3'), and Sri Harini Textiles Ltd.

 

For the half year ended September 30,2022, RIL (on a standalone basis) had a profit after tax (PAT) of Rs 83 crore (Rs 106 crore in the corresponding period of fiscal 2022), on net revenue of Rs 714 crore (Rs 611 crore).

Any other information: Not Applicable