| The KCP Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its ratings on the bank facilities, non-convertible debentures, and fixed deposits of The KCP Ltd (part of the KCP group) at 'CRISIL A-/FA/Stable/CRISIL A2+'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of The KCP Ltd, KCP Vietnam Industries Ltd (KCP Vietnam), and joint venture, Fives Cail KCP Ltd. This is because the three entities, collectively referred to as the KCP group, have common management and financial linkages. |
| Key Rating Drivers & Detailed Description |
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Strengths * Established track record in the cement and sugar businesses: The cement business witnessed volume growth of around 15% in fiscal 2017, in line with demand uptick in South India. Overall sales from this segment increased to Rs 848 crore in fiscal 2017 from Rs 766 crore in fiscal 2016. Cement realisations declined in fiscal 2017, resulting in decrease in EBIT margins to 13.3% from 14.4% in fiscal 2016. Overall performance was in line with peers in the south Indian market. The cement division is expected to benefit further from volume increase in South India due to higher infrastructure spending in core markets of Andhra Pradesh and Telangana. Revenue from the sugar segment declined 10% in fiscal 2017 as sugarcane production in Vietnam was affected by El Nina. However, realisations improved, in line with increase in global prices. The group will continue to benefit over the medium term from its steady revenue and profitability from the sugar division, and over the long term from its longstanding presence and expected improvement in demand outlook in the cement segment. * Adequate financial risk profile: Financial risk profile is backed by steady cash accrual, healthy capital structure, and comfortable debt protection metrics. Gearing was comfortable at 0.63 time as on March 31, 2017. Despite debt-funded capacity expansion, overall financial risk profile will remain stable due to healthy operating margin and cash accrual. Gearing is expected to peak to around 0.72 time as on March 31, 2018, but recover thereafter. Interest coverage and net cash accrual to debt ratios are expected to remain at over 4 times and 0.23 time, respectively, over the medium term. Weakness * Exposure to project-related risks: The group is undertaking a brownfield expansion programme of Rs 472 crore to increase cement capacity by 1.66 million tonne per annum (mtpa) at its unit in Muktyala, Andhra Pradesh. Project also includes a clinker unit of 1.55 mtpa and railway siding. Overall project cost increased from Rs 380 crore to Rs. 472 crores on account of increase in the cost of steel foundations, and increase in interest during construction and working capital margin. Commercial production is likely to begin from October 2018. The company has tied up for debt of Rs 354 crores for the project which has a moratorium of two years (repayments to begin from fiscal 2019). While debt-funded capital expenditure (capex) exposes the group to project-related risks, improvement in business risk profile and management's track record of successfully executing large projects will mitigate impact on credit risk profile. Despite increase in project cost, debt-equity ratio is favourable at 3:1, with majority of cost increase being funded by internal accrual. * Weak performance of engineering and hotel businesses: The engineering and capital goods industry is highly vulnerable to economic cycles on account of its linkages to the capex plans of customers, which are affected by slowdown in industrial growth. Despite healthy order book, sales in engineering division had been impacted by cyclone Vardah in fiscal 2017, leading to lower orders executed from its Chennai facility. The company also has operations under the hospitality segment. Even though, the Hotel is in its initial stage of operations, with the commencement of operations only in April 2016, the Company has been able to gradually ramp-up its occupancy levels. CRISIL believes, in both the aforementioned segments, while the performance is likely to gradually improve, however high fixed cost will continue to weigh upon profitability over the medium term. * Demand-supply mismatch in South India's cement industry: Demand in South India grew 5.5% year-on-year in fiscal 2017, driven by demand from state capital of Andhra Pradesh, Amaravati and irrigation and housing projects in Telangana. However, with continued low utilisation rates, prices declined by 6-7% year-on-year. As demand-supply balance improves in Andhra Pradesh with the building of Amravati, marginal uptick in prices is expected in fiscal 2018. |
| Outlook: Stable |
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CRISIL believes the KCP group's business risk profile will continue to benefit over the medium term from established market position in the cement and sugar businesses. Financial risk profile is expected to remain adequate, backed by healthy operating margin and comfortable capital structure. |
| About the Group |
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The KCP group was founded in 1941 by Mr V Ramakrishna, a first-generation entrepreneur who began operations by setting up a sugar unit. Cement division commenced operations in 1958 and currently has two units, one each in Guntur (capacity of 0.66 mtpa) and Muktyala (1.86 mtpa); Andhra Pradesh. The heavy engineering division, set up in 1955 at Tiruvottiyur in Chennai, undertakes casting, fabrication, and machining of heavy equipment for core industries (sugar, cement, steel, and power). |
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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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
^Not yet availed |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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