Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank loan facilities of Star Cement Ltd (SCL) at ‘CRISIL AA/Stable/CRISIL A1+’.

 

The ratings factors in the market leadership and strong brand recall of the company in the north-east region, healthy operating profitability and robust financial risk profile. These strengths are partially offset by susceptibility to volatility in input prices, the commoditised nature of the product and exposure to risks associated with the sizeable, ongoing capital expenditure (capex).

 

SCL’s strong market position in the northeast is further enhanced with commissioning of 3.30 MTPA clinker unit and 2 MTPA grinding unit in March 2024 as anticipated. Successful stabilization and ramp up of utilization levels at these facilities will enable additional sales volume. Additionally, the group has ongoing projects to further enhance capacity in the northeast by 4 MTPA, through 2 MTPA grinding units each in Silchar (expected to get commissioned by third quarter of fiscal 2026) and Jorhat (expected to get commissioned by third quarter of fiscal 2027). The commissioning of these facilities will enable higher scale of operations and full balancing of cement and clinker capacities, thereby enabling higher utilization and strengthening of the business risk profile of the company. Further, the group also plans to set up an integrated unit at Rajasthan, over the next 3-4 years which will entail capex of Rs 3,000-3,500 crores, funded through internal accruals and external borrowings. The financial risk profile is expected to remain robust even with planned capex, with cash accruals of more than Rs 2,100 crore over the next three fiscals cumulatively, which will keep the overall external debt in check.

 

For fiscal 2024, SCL recorded revenue of Rs 2,912 crore (Rs 2,708 for fiscal 2023) at a consolidated level, driven by 10% on-year increase in volume to 4.4 million tonne (from 4.0 million tonne in fiscal 2023) due to healthy demand in the core north-eastern region. During the period, EBITDA/ton increased to Rs 1,281 from Rs 1,180 in fiscal 2023, as decline in input costs mitigated the impact of fall in realisations. During first quarter of fiscal 2025, SCL recorded sales volume of 1.15 MTPA (similar to 1.15 MTPA in corresponding period previous year) while sustaining healthy EBITDA/ton of Rs 1006.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SCL and its subsidiaries, collectively referred to as SCL herein. This is because all the companies are in the same or related businesses, have a common management and fungible cash flow.

 

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 and brand, and lesser competition in north-east India: SCL is a leading cement player in north-eastern India, supported by its strong brand. It had volume market share of ~24% as of March 31, 2024, in the region. Owing to its strength as a local brand, the company has been able to command higher prices compared with its peers in the region as reflected in its industry-leading blended realisations. Furthermore, competitive intensity is comparatively low in the north-eastern region as some of the pan-India players do not have manufacturing base in the region and transporting cement from outside the region is not economically viable owing to the high freight costs in the hilly terrain. This gives local players such as SCL an edge in terms of higher pricing flexibility.

 

SCL also has presence in eastern India primarily in West Bengal and Bihar. Additionally, SCL also plans to set up an integrated unit in Rajasthan, over the next 3-4 years. This would diversify its geographical presence and further strengthen its business risk profile.

 

• Healthy operating profitability: SCL has maintained healthy profitability over the years, as indicated by average Ebitda per tonne of more than Rs 1,450 over the decade through fiscal 2024, owing to better pricing flexibility, financial incentives and cost-efficient operations. Operating profitability recovered in fiscal 2024 with reduction in input costs, after moderated over the past 3-4 years owing to sunset of freight incentives and increase in sales volume outside the northeast (which fetch lower margins). Benefits from waste heat recovery system (WHRS) of 12 MW, efficient kilns, higher prices and SGST incentives on sales from grinding unit in Assam should mitigate the impact of any moderation in pricing over the medium term.

 

• Robust financial risk profile with strong debt protection metrics: SCL had negligible debt and healthy networth of Rs 2,705 crore as on March 31, 2024. While the company is expected to borrow to fund the ongoing sizeable expansion of Rs 3,000-3,500 crore, it is likely to maintain strong capital structure and healthy debt protection with strong accruals every year. Also, it has a track record of bringing down debt post commissioning of new capacities. Higher-than-expected leverage as a result of either new expansion or any potential acquisition will be a monitorable.

 

Weaknesses:

• Geographical concentration and small scale of operations: SCL is a regional player, with more than 71% of its sales volume being in the north-east, rendering the company vulnerable to demand and supply patterns in the region. However, the company is steadily diversifying in eastern India to reduce the geographical concentration. Further, it is also looking at increasing share in the trade segment. While favourable demand scenario and strong brand positioning are strong mitigating factors, geographical concentration will remain a risk over the medium term. Additionally, SCL has small (though growing) capacity compared with established, pan-India players.

 

• Susceptibility to volatility in input prices and cyclicality in the cement industry: Raw material, fuel (coal) and freight costs constitute more than 80% of the company’s total cost of production. Any rise in input prices exerts pressure on operating profitability, as has been the case in fiscal 2023. Furthermore, the commoditised nature of product limits pricing power and the company may not be able to pass on any significant increase in input prices entirely.

 

The cement industry is cyclical and it takes 3-4 years to operationalise and stabilise new capacity. Also, capacity expansion is lumpy, with most players setting up capacities simultaneously in anticipation of demand growth. This lumpiness in capacity addition and the fact that setting up small capacities is not often viable lead to oversupply in the initial years after the capacities become operational. Thus, the domestic cement industry faces excess supply every 3-4 years.

Liquidity: Strong

SCL has strong liquidity driven by cash and bank balance at approximately Rs 103 crore as of March 31, 2024 and expected accrual of close to Rs 500 crore in fiscal 2025. Further cushion is available in the form of moderately utilised fund-based bank lines of Rs 300 crore. SCL has minimal repayment obligations in fiscal 2025. While SCL will dip into its cash balance to fund the equity portion of capex, accruals and bank lines should be sufficient to cover for any incremental working capital requirements of the company.

Outlook: Stable

CRISIL Ratings believes SCL will maintain a strong credit risk profile over the medium term on back of its strong credit metrics and with commencement of additional capacities, resulting in increased scale of operations and superior cash accruals.

Rating sensitivity factors

Upward factors:

• Meaningful diversification into 2 or more regions resulting in significant improvement in scale and market share while sustaining strong operating performance.
• Maintenance of robust balance sheet with low gearing after the capex phase.

 

Downward factors:

• Slower-than-expected ramp-up of new capacities or material delays in completion of the capex.
• Any substantial debt-funded capex or acquisition or decline in profitability resulting in net debt to Ebitda ratio above 2-2.5 times on a sustained basis.

About the Company

Based in Lumshnong (Meghalaya), SCL (formerly Cement Manufacturing Company Ltd [CMCL]) was earlier a subsidiary of Century Plyboard (India) Ltd (CPIL). It commenced operations in December 2004. After a demerger in April 2012, CPIL transferred its cement, ferroalloy and power divisions to Star Ferro and Cement Ltd (SFCL), which held 70.5% in CMCL. In March 2015, the businesses were further demerged. The ferroalloy and power businesses were transferred to Shyam Century Ferrous Ltd (SCFL). SCL got its present name in June 2016. In August 2016, the board approved reverse merger of SFCL into SCL, which was completed in the first quarter of fiscal 2018, post which SCL, the operating company has become the listed parent company.

 

SCL has a combined cement manufacturing capacity of 7.70 MTPA, clinker manufacturing capacity of 6.1 MTPA, 12.3 MW WHRS and a captive power plant with capacity of 51 MW as of June 30, 2024.

Any other information: Not Applicable