Detailed Rationale

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

 

During the first six months of fiscal 2021, the standalone operating income increased by 4% compared with the corresponding period of the previous fiscal despite the lockdown impact during the months of April - May 2020. The strong pent up demand for asbestos roofing products mainly due to reverse migration of rural population led to better average realizations and consequent improvement in profitability to 18.1% compared to 11.2% last year.

 

The demand for asbestos roofing products is likely to improve with the anticipated increase in rural income in fiscal 2022, driven by good monsoons and crop output. The calcium silicate board and textile products are also expected to improve driven by demand recovery in end markets. These factors, along with steady demand in Sri Lanka, should help achieve moderate volume growth of 8-10% over the medium term. The operating margin should also remain steady at about 13% levels given the brand equity in the market and increasing share of value-added products.

 

The rating continues to reflect an established position in the domestic asbestos cement (AC) roofing market and improving presence in the Sri Lankan market, and healthy revenue diversity through a presence in textiles, calcium silicate boards, and wind power segments. The rating also reflects 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 financial flexibility. These strengths are partially offset by dependence of the AC roofing business on rural spending, and exposure to intense competition from peers as well as from substitute 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 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 considers these entities as being strategic to RIL in view of their strong integration with the company’s operations. Further, outstanding amounts against corporate guarantees provided to weaker Ramco group companies have been included as debt of RIL.

 

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 brand and also shield operations from regional demand-supply mismatches. During fiscal 2020, 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.

 

• Healthy revenue diversity: While the domestic AC roofing business continues to be the mainstay, contributing around 74% to overall revenue during fiscal 2020, the company also manufactures cotton yarn (13%) and calcium silicate boards (CSBs; 11%). AC roofing and CSBs comprise the building products division. 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 industry. CRISIL believes that improving revenue diversity should mitigate significant fluctuation in the company’s performance over the medium term.

 

• Healthy financial risk profile: RIL's financial risk profile is healthy marked by healthy networth, declining debt and improving debt protection metrics over the last two years. The adjusted gearing (including guarantees provided to group companies) remains healthy at 0.32 times as on March 31, 2020 (against 0.28 times a year earlier). The net cash accrual to total debt and interest coverage ratios also remains healthy at about 0.32 time and 9.88 times, respectively, in fiscal 2020 as compared to 0.28 time and 10.04 times, respectively, in fiscal 2019. Cash generation should increase steadily supported by sustenance of the operating profitability margin at 12-13% over the medium term, supported by increasing diversification into higher margin non-asbestos products and stable Sri Lankan operations. Also, CRISIL does not expect an increase in guarantees provided to group entities, as the performance of these is gradually improving. 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 4,258 crore (market value) as on January 25, 2021. 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.

 

Weaknesses:

• 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 crysotile) fibre is used, as blue and brown asbestos have been banned. Furthermore, all forms of asbestos mining are banned in the country. Regulatory changes concerning asbestos mining and usage will remain a key monitorable.

 

• 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 galvanised 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. During fiscal 2020, prices of raw materials for AC roofing (asbestos fibre and cement) had increased; the impact was mitigated as RIL was successful in passing on the cost increases to end customers. However, operating margin remains vulnerable to any further sharp price volatility or currency fluctuations. While the concentration risk has been mitigated by diversification into CSBs 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 expected at Rs 120-130 crore per fiscal over the medium term, Average utilisation of the bank limit of Rs 550 crore was about 43% during the 12 months through November 2020. The company has long term repayment obligation of around Rs 23 crore and Rs 10 crore in fiscals 2021 and 2022, respectively. Capital expenditure of around Rs 50 crore per fiscal will be invested towards modernization of facilities. Cash accrual, cash and cash equivalents, and unutilised bank lines should be sufficient to meet funding requirements. With an adjusted gearing of 0.32 time as on March 31, 2020, there is sufficient headroom to raise additional debt. Liquidity is also supported by the significant value of investments in listed Ramco group companies and the goodwill the group has in the lending community.

Rating Sensitivity factors

Downward factors

•       An extended material slowdown in demand for AC roofing resulting in considerable decline in RIL’s revenues

•       Sustained decline in operating margins in the medium term to below 8% due to continued increase in input prices or due to pricing pressure following challenging market conditions

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 Rajapalyam, 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/Negative/CRISIL A1'), Rajapalayam Textile Ltd ('CRISIL BBB-/Stable'), Ramaraju Surgical Cotton Mills Ltd ('CRISIL BBB+/Stable/CRISIL A2'), Sri Vishnu Shankar Mills Ltd ('CRISIL BBB/Stable/CRISIL A3+'), Sandhya Spinning Mills Ltd ('CRISIL BB+/Stable/CRISIL A4+'), and Sri Harini Textiles Ltd.

 

For the six months ended September 30, 2020, RIL (on a standalone basis) had a profit after tax (PAT) of Rs 57 crore (Rs 47 crore in the corresponding period of fiscal 2020), on net revenue of Rs 480 crore (Rs 473 crore).

Key Financial Indicators

As on / for the period ended March 31		2020	2019
Revenue	Rs crore	978	1039
Profit after tax (PAT)	Rs crore	69	74
PAT margin	%	7.0	7.2
Adjusted debt/adjusted net worth	Times	0.32	0.28
Interest coverage	Times	9.88	10.04

 

Any other information: Not applicable

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	Commercial Paper	NA	NA	7-365 days	100	Simple	CRISIL A1+

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Ramco Industries Limited	Full	Holding
M/s. Sudharsanam Investments Limited	Full	Co-Subsidiary
Sri Ramco Lanka (Private) Limited	Full	Co-Subsidiary
Sri Ramco Roofings Lanka (Private) Limited	Full	Co-Subsidiary