Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of The Ramco Cements Limited (TRCL).

 

The rating continues to reflect the strong market position of the company in southern region and its healthy financial risk profile. These strengths are partially offset by modest return on capital employed (RoCE) and susceptibility to volatility in input prices and cyclicality in the cement industry.

 

In the first nine months of fiscal 2023, operating income increased 30.2% on-year, supported by 29.7% growth in sales volumes. However, earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne declined to Rs 759 during the same period from Rs 1,267 in the corresponding period of the previous fiscal, owing to steep rise in power and fuel cost, as witnessed across the cement industry, especially during the first half of fiscal 2023. For fiscal 2023, sales volumes are estimated to have grown at a healthy pace of more than 30% supported by new products introduced and new markets tapped along with healthy demand from the individual housing and infrastructure development, especially in the southern region. The healthy volume growth shall prevent any significant decline in absolute Ebitda. In fiscal 2024, Ebitda per ton is expected to improve from current levels as coal/petcoke prices have come down significantly from their peaks over the past 4-5 months and the benefit of reduction in coal/ petcoke prices will be visible as the existing high-cost inventory is likely to be consumed by fiscal 2023. Lower freight cost with rationalisation of clinker movement and benefits from investments in waste heat recovery system (WHRS) should aid margin expansion in fiscal 2024.

 

The financial risk profile of the company continues to remain healthy despite larger-than-anticipated capital expenditure (capex), resulting in estimated net debt to Ebitda ratio inching above 4 times in fiscal 2023 from 2.91 times in fiscal 2022. The capex of Rs 1,376 crore in the first nine months of fiscal 2023 was higher than anticipated and is on account of frontloading of capex which also includes preparatory work for capex in next phases. The capex is expected to reduce from current levels going forward and accordingly net debt to Ebitda ratio is expected below 3 times from fiscal 2024. Debt protection metrics are estimated to have moderated in fiscal 2023, with interest cover of below 5 times in fiscal 2023 from 11.6 times in fiscal 2022 and net cash accruals to adjusted debt at below 0.2 times in fiscal 2023 from 0.33 times a year ago. The debt protection metrics are expected to improve going forward once accruals from incremental capacities and benefit of cost realisation accrues. The financial risk profile would remain comfortable driven by healthy capital structure and adequate liquidity.

Analytical Approach

CRISIL Ratings has treated the corporate guarantees given by TRCL to its affiliates as part of TRCL's debt. Also, CRISIL Ratings has combined the business and financial risk profiles of TRCL and its subsidiaries and associates as the entities have strong operational and financial linkages.

 

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:

Strong market position in south India and growing market position in east India

TRCL has a combined manufacturing capacity of around 21 MTPA as on March 31, 2023, spread across Tamil Nadu, Karnataka, Andhra Pradesh, Odisha and West Bengal. The company has an established market presence in south India (contributing to 75% of overall sales in the first nine months of fiscal 2023) as well as strong brand recognition in the region, with key markets being Tamil Nadu, Kerala, Karnataka and Andhra Pradesh.

 

Out of the overall capacity, TRCL has been operating 2 MTPA capacity in Kolaghat (West Bengal), 2 MTPA capacity in Vizag (Andhra Pradesh) and 0.9 MTPA capacity in Haridaspur (Odisha) to service the eastern market, which contributed to 20% of overall sales in the first nine months of fiscal 2023. The share of the faster growing east market is expected to grow driven by healthy demand prospects in the region along with expected commissioning of further 0.9 MTPA capacity in Odisha by September 2023.

 

CRISIL Ratings believes TRCL will retain its strong brand image in the south market and maintain steady cash accrual, while gradually establishing itself in the new markets over the medium term.

 

Healthy operating efficiency

Operating efficiency arises from sharp focus on operations supported by presence of captive power plants, which meet majority of the power requirement, setting up of split grinding units near markets which helped in better management of freight cost, and continuous investment to increase operating efficiencies. The company is estimated to have increased capacity utilisation to above 70% in fiscal 2023. With the ramping up of production in its recently commissioned Kurnool facility, savings in terms of freight cost is also expected. Also, the company has implemented WHRS of 8 MW in its Kurnool plant, while another 4 MW of WHRS and 18 MW of TPP is expected to be commissioned by May 2023 and fiscal 2024, respectively.

 

Healthy financial risk profile

The financial risk profile has been healthy, marked by sufficient cash accrual, low gearing and adequate debt protection metrics.

 

Gearing is estimated to be 0.70 time (based on gross debt) as on March 31, 2023. Net cash accrual to adjusted debt is estimated to reduce to 0.16 time in fiscal 2023 from 0.33 times in fiscal 2022, due to higher debt levels while accruals are estimated to have reduced owing to cost pressures. In fiscal 2024, the capex is expected to reduce as compared to fiscal 2023 with incremental accruals expected from newly commissioned facilities, cost rationalisation as well as softening of input prices.

 

With capex intensity expected to reduce going forward, the financial risk profile will remain healthy over the medium term, aided by healthy profitability, and sufficient cash accrual. However, implementation of any further debt-funded capex may constrain the financial risk profile, and thus will remain a key monitorable.

 

TRCL is the flagship company of the Ramco group, which has a lineage of over 80 years, and healthy relationships with the lending community and capital markets. This is also reflected in the competitive interest rates enjoyed by TRCL.

 

Weakness:

Modest RoCE as investment made over the past 4-5 years are yet to yield full benefits

The company has incurred capex of more than Rs 5,600 crore during fiscal 2020 to fiscal 2022. However, cash accruals have not yet increased proportionately as capacity utilisation remained between 50-61% leading to moderate single-digit RoCE. While the capacity utilisation is estimated to have increased above 70% in fiscal 2023, the RoCE is expected to remain modest at below 10% over the medium term as new capacities will stabilise and profitability will improve only gradually.

 

Susceptibility to volatility in input cost and realisations, and cyclicality in the cement industry
Capacity addition in the cement industry tends to be sporadic because of the long gestation period for setting up a facility and numerous players adding capacity during the peak of a cycle. This has led to unfavourable price cycles for the sector in the past. Moreover, profitability remains exposed to volatility in input prices, including raw material, power, fuel and freight. Increase in coal and pet coke prices in the second half of fiscal 2022 and during fiscal 2023 impacted the profitability of all cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors.

Liquidity- Strong

TRCL enjoys healthy liquidity driven by expected cash accruals of more than Rs 1000 crores per annum in fiscal 2024 and 2025. TRCL also has access to fund-based limits which are moderately utilized. The company has repayment obligations around Rs 850 for fiscal 2024 crore with accruals sufficient to meet the repayment obligation. The company is expected to fund its capex requirements through a mix of internal accruals and debt. Its bank lines are expected to meet its incremental working capital requirements, which are assessed to be minimal.

 

ESG profile

TRCL’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 the energy-intensive cement manufacturing process and its high dependence on natural resources such as limestone and coal as key raw materials. The sector has social impact as operations affect local community and involve health hazards. TRCL has continuously focused on mitigating its environment and social risks.

 

Key ESG highlights:

• TRCL has deployed strategies to reduce carbon footprint in its entire production process. The company has been working towards greener and cleaner technology with 15% contribution of renewable energy in fiscal 2022.
• has performed rehabilitation of the mined-out land at Pandalgudi, Tamil Nadu and developed an eco-park which would cover 800 acres of land.
• In TRCL, various corporate social responsibility (CSR) and social projects have been taken up, including education and upskilling of weak sections of society, women empowerment and conservation of forests.
• Additionally, the company reported zero employee injuries in the past two years making it a highly safe workspace.
• Its governance structure is characterised by 86% of its Board comprising independent directors, dedicated investor grievance redressal system and extensive disclosures.
• There is growing importance of ESG among investors and lenders. TRCL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high access to domestic capital markets.

Rating Sensitivity Factors

Downward Factors

• Sustained weakening in operating performance due to lower-than-expected demand
• Larger than expected debt-funded capex leading to decline in net debt to EBIDTA to over 3.5 times on a sustainable basis

About the Company

TRCL is a leading cement player with capacity of around 21 MTPA spread across Tamil Nadu, Andhra Pradesh, Karnataka, Odisha and West Bengal. Set up in 1957, the company manufactures and markets cement under the brand Ramco, predominantly in south India. It also has windmill capacity of 166 MW, captive thermal power plants with capacity of 175 MW and WHRS of 39 MW.

 

TRCL is the flagship company of the Ramco group, which deals in cement, fibre cement sheets, textiles (cotton yarn) and information technology. Other companies in the group include Rajapalayam Mills Ltd ('CRISIL A+/Stable/CRISIL A1'), Ramco Industries Ltd ('CRISIL A1+') and Ramco Systems Ltd. The group was founded in 1938 by Late Mr P A C Ramasamy Raja and is presently managed by his grandson, Mr P R Venketrama Raja.

 

In the first nine months of fiscal 2023, TRCL’s consolidated revenue was Rs 5,585 crore and profit after tax (PAT) was Rs 164 crore, compared with revenue of Rs 4,290 crore and PAT of Rs 764 crore in the corresponding period of fiscal 2022.

Any other information: Not applicable