Rating Rationale
September 27, 2018 | Mumbai
Star Cement Limited
'CRISIL A1+' assigned to CP 
 
Rating Action
Rs.30 Crore Commercial Paper CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A1+' rating to the commercial paper program of Star Cement Limited (SCL; part of the Star Cement group).

The rating reflects a healthy business risk profile supported by a leadership position in the north-east region (NER) of India, healthy operating profitability, and a robust financial risk profile. The group has a market share of ~23% in NER and a strong brand, which enable higher realisations. This is aided by proximity to raw material sources and fiscal incentives. The group also benefits from the healthy demand growth of 7-8% per annum expected in NER. The financial risk profile has improved significantly post receipt of government subsidy, which has largely been used to repay debt. The improved financial risk profile is expected to be sustained on account of healthy cash accrual and no major capital expenditure (capex) plans over the medium term. Total debt has reduced to Rs 116 crore as on August 31, 2018, from Rs 801 crore as on March 31, 2017. The debt protection metrics are also healthy with the debt to EBITDA (earnings before interest, tax, depreciation, and amortisation) ratio at 0.83 time as on March 31, 2018.

These rating strengths are partially offset by exposure to project risks related to capex plans, volatility in raw material prices, and the cyclical nature of the cement industry.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of SCL and its subsidiaries, Star Cement Meghalaya Ltd, Meghalaya Power Ltd, and Megha Technical and Engineers Pvt Ltd. That's because all these companies, collectively referred to as the Star Cement group, have a common management and intra-corporate transactions.

Key Rating Drivers & Detailed Description
Strengths
* Leadership position in NER
The group is a leading cement player in the north-eastern region with a market share of ~23% in the region. Its strong brand image enables it to garner higher realisations. The group ventured into eastern India in 2013, predominantly supplying to the markets of West Bengal and Bihar. In fiscal 2018, around 73% of revenue was derived from NER and 27% from the eastern markets.

* Healthy operating profitability
Operating profitability is healthy with EBITDA/ton of Rs 2016/ton in fiscal 2018. The same was aided by higher realisations, proximity to raw material sources, and fiscal incentives. The group has access to captive limestone mines, and coal is procured locally. Power requirement for the Meghalaya units is met from a captive power plant of 51 megawatt (MW). The group also benefits from the healthy demand growth in NER, expected at 7-8% per annum over the medium term.

As part of the government's North Eastern Investment Policy, the group is entitled to receive transport, capital, and goods and service tax (GST) subsidies. The expiry of the transport subsidy benefit in January 2018 is expected to have an impact of Rs 300-350/tonne on the EBITDA. GST subsidy is available till fiscal 2023 for the plant in Guwahati and till fiscal 2027 for the plant in Lumshnong, Meghalaya. Operating profitability is expected to remain healthy despite expiry of the transport subsidy as the group has changed its sales mix to target areas with higher realisations and lower freight costs.

* Significant improvement in the financial risk profile
Financial risk profile has improved significantly post receipt of government subsidy. Subsidy of Rs 510 crore was received in fiscal 2018 and the first quarter of fiscal 2019. The subsidy has been used to repay debt, which has reduced to Rs 116 crore as on August 31, 2018, from Rs 801 crore as on March 31, 2017. The capital structure is strong, with a gearing of 0.28 time as on March 31, 2018. The debt protection metrics are healthy, with debt to EBITDA ratio of 0.83 time as on March 31, 2018.

Total subsidy backlog now stands at Rs 430 crore and subsidy accrual would be minimal. Timely receipt of the remaining subsidy would remain a key monitorable.  The rating also factors in an expectation of the group sustaining the improved financial risk profile on account of healthy accrual and no major capex plans over the medium term.

Weaknesses
* Exposure to project risks related to capex plans
The group plans to build a 2 million tonne per annum (mtpa) cement grinding capacity in Siliguri, which should be ready for commissioning by March 2020. The total project cost of Rs 445 crore will be funded by debt of Rs 290 crore and cash accrual of Rs 155 crore. The amount of debt drawdown for the project would be dependent on subsidy receipts from the government. Thereafter, the group has plans to expand capacity in eastern India and to increase capacity to 10 mtpa over the long term. It will remain exposed to implementation, funding, and time overrun risks related to these capex plans. However, it plans to maintain its strong balance sheet despite these plans.

* Exposure to volatility in raw material prices and cyclicality in the cement industry
Profitability in the cement industry is susceptible to volatility in cost of inputs such as raw material, power, fuel, and freight. The group is a regional player, making it more vulnerable to regional demand and supply patterns.
About the Group

Based in Lumshnong, SCL (formerly, Cement Manufacturing Company Ltd) 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 SCL. In March 2015, the businesses were further demerged. The ferroalloy and power businesses were transferred to Shyam Century Ferrous Ltd (SCFL) and the cement business to SFCL. SCL got its present name in June 2016. In August 2016, the board approved a reverse merger of SFCL into SCL, which was completed in the first quarter of fiscal 2018, post which SCL, the operating entity, has become the listed parent company. The Star Cement group has a combined cement manufacturing capacity of 4.40 mtpa (including 0.67 mtpa at its hired unit), clinker manufacturing capacity of 2.54 mtpa, and a captive power plant with a capacity of 51 MW.

Key Financial Indicators*
Particulars Unit 2018 2017
Revenue Rs crore 1,606 1,520
Profit After Tax (PAT) Rs crore 327 178
PAT Margin % 20.2 11.6
Adjusted debt/ adjusted networth Times 0.28 0.67
Interest coverage Times 10.02 5.26
*In the first quarter of fiscal 2019, net profit was Rs 92 crore on net sales of Rs 518 crore.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue Size 
(Rs.Cr)		 Rating assigned
with outlook
NA Commercial Paper NA NA 7-365 days 30 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  30.00  CRISIL A1+    --    --    --    --  -- 
Fund-based Bank Facilities  LT/ST    --    --  21-11-17  Withdrawn/ Withdrawn      26-10-15  CRISIL A/Positive  CRISIL A/Stable/ CRISIL A1 
            31-01-17  CRISIL A/Stable/ CRISIL A1           
Non Fund-based Bank Facilities  LT/ST    --    --  21-11-17  Withdrawn      26-10-15  CRISIL A1  CRISIL A1 
            31-01-17  CRISIL A1           
All amounts are in Rs.Cr.
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
Rating Criteria for Cement Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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