Rating Rationale

Strengths
* Strong market position in South India: TRCL has combined manufacturing capacity of around 16.5 million tonne per annum (mtpa) as on June 30, 2017, spread across Tamil Nadu, Karnataka, Andhra Pradesh and West Bengal. TRCL has an established (deriving 79% of overall sales in fiscal 2017) market presence in South India, and strong brand recognition in the region, with its key markets being Tamil Nadu, Kerala and Andhra Pradesh. Furthermore, with 0.95 mtpa capacity commissioned in Kolaghat (West Bengal) and 0.95 mtpa capacity in Vizag (Andhra Pradesh), to service the eastern market, which now forms 21% of overall sales in fiscal 2017.

The company also has capital expenditure (capex) plans to set up additional 3.1 mtpa of grinding units at Vizag, Kolaghat and Odisha, to further reduce dependence on south market and thereby diversify the revenue steam.

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

* Healthy operating efficiency: TRCL is among the most efficient players in the cement industry. Its operating efficiency arises from sharp focus on operations supported by presence of captive power plants, which meet its entire 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. Operating profit per tonne of cement remains one of the highest in the industry (above Rs 1,400 per tonne for the past two years). TRCL reported healthy operating margin of 30% in fiscal 2017, though it marginally declined to 28% in the first quarter of fiscal 2018 owing to higher power and fuel and transportation costs and resultant pricing pressures across the industry. Despite the decline, operating profitability has been the best in the industry.

High operating efficiencies and healthy operating margin are likely to continue over the medium term, thereby enabling TRCL to retain cost leadership in the Indian cement industry.

* Strong financial risk profile
The financial risk profile has been strong, with moderate cash accrual, healthy gearing, and adequate debt protection metrics.

Gearing was 0.44 time (based on gross debt) as on March 31, 2017. Net cash accrual to adjusted debt and interest coverage ratios were 0.54 time and 12 times, respectively, in fiscal 2017.

Cash accrual of over Rs 850 crore is projected annually over the medium term, sufficient to service yearly debt repayment of Rs 300 crore. The company is planning to undertake capex of Rs 1,095 crore over the two fiscals through fiscal 2019, which will be funded through cash accrual.

The financial risk profile will however, remain strong over the medium term, aided by healthy profitability, sufficient cash accrual and low reliance on debt. Implementation of any major 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 solid relationships with the lending community and capital markets. This is also reflected in the fine interest rates enjoyed by TRCL.

Weaknesses
* Moderate capacity utilisation
Capacity utilisation continues to be moderate at 52% in fiscal 2017. However, there has been an improvement in utilisation levels over the last three years aided by higher sales to eastern India. Going forward, with satellite grinding units being set up to service the eastern market, the improvement in utilisation is a key monitorable.

Capacity additions by other players in the eastern market, combined with moderate growth in cement demand in southern market, may result in slow sales, bringing down the operating rates, and constraining the ability to pass on rise in input costs to customers. While profitability may be restricted in a weak operating environment, the strong capital structure and healthy liquidity should support debt protection metrics.

* Input costs related risk and cyclicality in cement industry
Profitability is susceptible to volatility in input costs such as material, power, fuel and freight costs, in line with the industry. Power and fuel costs were supported by low cost pet coke inventory in fiscal 2017. However, the costs are expected to increase in fiscal 2018 with higher prices of coal and pet coke. This will lead to some moderation in operating margin.