Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank facilities of Shree Cement Limited (SCL).

 

In the first half of fiscal 2022, sales volume increased around 15% (year-on-year) in the domestic market, despite the adverse impact of the Covid-19 pandemic in the first quarter of the fiscal. Operating earnings before interest, tax, depreciation and amortisation (operating Ebitda) margin moderated to 27.7% because of higher input costs, especially power and fuel cost. While the Ebitda margin may moderate further as a large part of the cost inflation is yet to be absorbed, the impact will be partly offset by better realisations and efficiency measures adopted. Growth in sales volume is likely to remain flat in fiscal 2022 amid uncertainty on the impact of the third wave of the pandemic.

 

Domestic cement capacity was 43.4 million tonne per annum (MTPA) as on September 30, 2021. The capacity in Patas, Maharashtra, is likely to be commissioned in the fourth quarter of fiscal 2022, while the clinker unit in Raipur, Chhattisgarh, is expected to be commissioned in the first half of fiscal 2023. The clinker grinding unit of 3 MTPA in Purulia, West Bengal, is expected to be commissioned by end of fiscal 2023, while 3.8 MTPA clinker and 3.5 MTPA grinding unit in Nawalgarh, Rajasthan, is expected to be commissioned by end of fiscal 2024. Commencement of operations in these units will further strengthen the market position of the company. The company is expected to undertake capital expenditure (capex) of Rs 5,500- 6,000 crore over the next three years to increase the domestic capacity to around 57 MTPA. The capex will be funded through surplus in cash accrual and liquidity.

 

The financial risk profile continues to be robust, indicated by gearing of 0.14 time as on March 31, 2021, supported by healthy liquid surplus of above Rs 8,000 crore as of September 30, 2021.

 

The ratings continue to reflect the healthy business risk profile of SCL, backed by its established market position in northern India, increasing presence in eastern India and entry in the southern market along with cost-efficient operations. The ratings also factor in a strong financial risk profile. These strengths are partially offset by susceptibility to risk of volatility in input cost and in realisation, commoditised and cyclical nature of the cement industry. Any substantial, debt-funded capex or acquisition, which may weaken the financial risk profile, will be a key rating sensitivity factor.

Analytical Approach

Business and financial risk profiles of SCL and its subsidiaries have been consolidated for this rating action as these entities have significant business and financial linkages and are under a common management. All these entities are collectively referred to herein as SCL.

 

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 market position

SCL, which started operations in 1979 at its first greenfield cement plant in Beawar (Rajasthan), is the third-largest cement group in India; its domestic operational capacity was 43.4 mtpa as on September 30, 2021. From 100% of its capacity in North India until 2014, SCL has diversified over the past three years, with capacities now in Rajasthan, Uttarakhand, Bihar, Chhattisgarh, Haryana, Uttar Pradesh, Karnataka, Jharkhand and Odisha. The company further diversified its presence in the global market by acquiring UCC, a cement company based in Ras-Al-Khaimah, UAE. SCL adopts a multi-brand strategy (comprising brands such as Shree Jung Rodhak, Bangur, Bangur power, Roofon and Rockstrong), which allows it to cater to different segments. Increased scale and improved geographical access to central and eastern India and entry in the southern market will further enhance its market position. UCC’s plant is in close proximity to the Saqr port in Ras-Al-Khaimah, which provides direct access to export markets in the Arabian Gulf, the Middle East and East Africa. Thus, SCL remains less vulnerable to the vagaries of a single regional market.

 

• Robust operating profitability, led by cost efficiency

SCL is among the most efficient players in the cement industry. Its operating efficiency arises from its sharp focus on operations, low power consumption and majority sale of blended cement, resulting in reduced consumption of energy and low raw material per tonne of cement. Also, selling expense is modest because of proximity to end-user markets and use of split-grinding units. The company had total power generation capacity of 752 MW (including 211 MW of waste heat recovery plant) as on March 31, 2021. Flexibility in the power plants (to switch to grid or to shut down plant based on merchant tariff) and ability to operate with multiple fuels results in cost-competitive generation in a dynamic scenario. Operating profit per tonne of cement remains one of the highest in the industry.

 

• Strong financial risk profile, driven by robust cash flow

The financial risk profile should remain supported by strong cash accrual of over Rs 3,000 crore expected in fiscal 2022 and liquidity surplus of more than Rs 8,000 crore as on September 30, 2021. Gearing was 0.14 time (based on gross debt) as on March 31, 2021. Major portion of the proposed capex of Rs 5,500-6,000 crore will be funded through cash accrual.

 

Weakness:

• Susceptibility to risks relating to input cost, realisations and cyclicality in the cement industry

Capacity addition in the cement industry tends to be sporadic because of long gestation period for setting up the facility and the numerous players adding capacity during the peak of a cycle. This led to unfavourable price cycles for the sector in the past. Moreover, profitability remains exposed to volatility in prices of inputs, including raw material, power, fuel and freight. Increase in pet coke prices in fiscal 2019 impacted profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and other regional factors.

Liquidity: Superior

Liquidity remains robust, aided by sufficient cash accrual and surplus cash and cash equivalent (including liquid investments) of above Rs 8,000 crore as on September 30, 2021. Cash accrual is projected at over Rs 3,000 crore per annum over the medium term, sufficient to cover the working capital and capex requirements.

 

ESG profile

CRISIL Ratings believes SCL’s environment, social and governance (ESG) profile supports its already strong credit risk profile.

 

The cement sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption. This is because of energy intensive cement manufacturing process and its high dependence on natural resources such as limestone, coal as key raw materials. The sector has social impact due to its nature of operations affecting local community and health hazards involved.

SCL has continuously focussed on mitigating its environmental and social risks.

 

Key ESG highlights of SCL:

• SCL has plans to reduce the carbon footprint of its entire production process. It aims to reduce scope-1 emissions by 12.7% and scope-2 emissions by 27.1% by 2030 on base of fiscal 2019. In fiscal 2021, scope-1 carbon intensity was at 0.54 tonnes CO2 per tonne cementitious material vs 0.58 in fiscal 2019 registering a decline of around 7%.
• In fiscal 2021, the share of renewable energy in the overall energy consumption of the company was 48% vis-à-vis 45% in fiscal 2020, which is the best in the industry. During September 2021, SCL announced plans to set up solar power plants having capacity upto 106 MW by fiscal 2023. The same is estimated to increase the share of renewable energy in overall consumption to around 55%.
• The company has reported zero loss time injury frequency rate (LTIFR) for permanent employees in fiscal 2021. However, gender diversity remains low for the company as seen in other peers
• The governance structure is characterised by majority of the board members being independent directors, split in chairman and executive positions, dedicated investor grievance redressal mechanism and extensive disclosures.

 

There is a growing importance of ESG among investors and lenders. SCL’s commitment to ESG will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook: Stable

SCL will continue to benefit from its healthy market position and geographically diversified presence in India. Healthy revenue growth and profitability will lead to adequate cash accrual and cash surplus, ensuring that the financial risk profile remains strong.

Rating Sensitivity factors

Downward factors

• Inorganic growth plan or larger-than-expected capex in an adverse operating environment
• Decline in operating performance, resulting in the net debt to EBITDA ratio deteriorating to 0.5 time on a sustainable basis.

About the Company

SCL was incorporated in 1979 by the Kolkata-based BG Bangur group for setting up a greenfield cement plant in Beawar, with capacity of 0.6 mtpa of Portland cement. SCL is the flagship company of the BG Bangur group and had domestic cement capacity of 43.4 mtpa as on September 30, 2021.

 

In July 2018, SCL acquired 97.61% stake in UCC, which had clinker capacity of 3.3 mtpa and cement capacity of 4.0 mtpa (presently 3.3 mtpa and 4.8 mtpa respectively). UCC deals with a variety of cement including ordinary Portland cement, sulphate-resisting cement and oil-well cement.

 

For the six months ended September 30, 2021, SCL reported profit after tax (PAT) of Rs 1,195 crore and operating income of Rs 7,008 crore, against Rs 858 crore and Rs 5,767 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Revenue	Rs crore	13476	12882
Profit after tax (PAT)	Rs crore	2290	1544
PAT margin	%	17.0	12.0
Adjusted debt / adjusted networth	Times	0.14	0.24
Interest coverage	Times	17.28	13.69

*CRISIL Ratings-adjusted consolidated financials

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 level	Rating assigned with outlook
NA	Fund-Based Facilities*	NA	NA	NA	1100	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit**	NA	NA	NA	800	NA	CRISIL A1+

*Fund-based limit consists of cash credit/working capital demand loan/buyer's credit/short-term loan
**Non-fund-based limit comprises letter of credit and bank guarantee/standby letter of credit/letter of undertaking

Annexure – List of entities consolidated

	Name of entity	Extent of consolidation	Rationale for consolidation
1	Raipur Handling and Infrastructure Pvt Ltd	Full consolidation	These entities have significant business and financial linkages and are under a common management
2	Shree Enterprises Management Ltd	Full consolidation
3	Shree Global FZE	Full consolidation
4	Union Cement Norcem Company Ltd LLC	Full consolidation
5	Shree International Holding Ltd	Full consolidation
6	UCC	Full consolidation