| Udaipur Cement Works Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Udaipur Cement Works Limited (UCWL).
The ratings continue to reflect the strategic importance of UCWL to JK Lakshmi Cement Ltd (JKLC; ‘CRISIL AA/Stable/CRISIL A1+') and strong support it receives from JKLC. The ratings also factor in UCWL's turnaround in operating performance and its high financial flexibility. These strengths are partially offset by average debt protection metrics, large debt-funded capital expenditure (capex) and susceptibility to input costs and cyclicality in the cement industry.
Considering external cement sales volume, operating income grew around 19% in fiscal 2022, driven by higher sales volume (up by 20%), while realisations were down by 0.7%. Profitability, as measured by earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne moderated in fiscal 2022 (around Rs 800 in fiscal 2022, as against Rs 957 in fiscal 2021) owing to rise in input costs. In the first half of fiscal 2023, operating income increased by 20% year-on-year owing to 20% rise in volume while realizations remained flat. However, Ebitda per tonne moderated to Rs 645 in first half of fiscal 2023 as against Rs 891 in the first half of fiscal 2022 due to elevated input cost.
In fiscal 2023, volume is expected to grow at a healthy pace due to strong expected demand from infrastructure segment. Realisations are also expected to improve. However, Ebitda per tonne is expected to moderate further as input costs remain elevated and the company’s inability to fully pass on the increased cost.
The financial risk profile moderated in fiscal 2022, as expected, with net debt to Ebitda of 3.7 times against 2.7 times in fiscal 2021, as UCWL raised debt to fund capex. The ratio is expected to further moderate until fiscal 2024 owing to drawdown of debt to fund the brownfield capex and improve thereafter over the medium term as contribution to revenue and profitability would meaningfully accrue from fiscal 2025 onwards. |
Analytical Approach CRISIL Ratings has applied its criteria for notching up ratings based on parent support. Outstanding preference shares, both cumulative redeemable preference shares and optionally convertible cumulative redeemable preference shares, have been treated as equity due to vested options to convert the preference shares to equity and long tenure of 18-20 years in case of redemption. |
Key Rating Drivers & Detailed Description Strengths: Strong support from the parent JKLC has high operational, managerial and financial integration with its subsidiary, UCWL. The parent has consolidated its position in its key markets of north and western region with the addition of UCWL's assets, as the latter accounts for around 16% of the combined capacity of 14.0 million tonne per annum (MTPA).
UCWL benefits from the parent's managerial support as two directors on the company’s Board are from the parent's Board, including the chairman who is JKLC’s vice chairman and managing director. The company also has been using the parent’s stronger and established brand for marketing of its product.
UCWL also receives strong financial and operational support from JKLC. In the past, UCWL has received funds from JKLC in the form of equity and preference shares. Also, JKLC has extended a corporate guarantee for the entire outstanding debt of UCWL (except loans under the Emergency Credit Line Guarantee Scheme) and intends to extend the same for future borrowing. Sourcing of major raw materials such as petcoke, coal and fly ash are done at group level, thus benefiting UCWL from JKLC’s scale of operations. Business transactions between UCWL and JKLC pertaining to purchase and sale of cement/clinker indicate rationalisation of the overall cost at the group level.
UCWL is likely to remain strategically important to JKLC and thus will continue to receive strong managerial, operational and financial support from the parent. However, the rating of UCWL will remain sensitive to the credit rating of JKLC.
Sustenance of operating profile after turnaround UCWL commenced operations with cement capacity of 1.6 MTPA at the end of fiscal 2017. This project was funded through debt of Rs 525 crore, promoter contribution of Rs 215 crore and balance through internal accrual. The company reported losses in fiscals 2018 and 2019 owing to initial stabilisation phase following which it significantly scaled up volume and profitability.
The company is operating at capacity utilization of above 80% with absolute Ebitda consistently above Rs 125 crore over the past three years. The Ebitda is expected to moderate in fiscal 2023 owing to elevated input costs. However, with the capacity addition and ramp up in operations, Ebitda is expected to improve over the medium term.
Weaknesses: Project implementation risks JKLC announced brownfield capex to be undertaken in UCWL for setting up 1.5 MTPA clinker capacity, 2.5 MTPA cement grinding capacity, along with waste heat recovery system (WHRS) plant and railway sidings. The overall project cost is estimated at Rs 1,650 crore and is to be funded through debt of Rs 1,100 crore (to be guaranteed by JKLC), rights issue in UCWL of Rs 400 crore and internal accrual of Rs 150 crore. The plant is expected to be commissioned ahead of its scheduled commercial operations date of September 2024. Given the size of the project, the company is exposed to execution risks and ability to ramp up new capacity. Hence, timely commencement of commercial operations, within budgeted cost, will remain a key monitorable. However, JKLC’s past track record of successfully completing various capacity addition projects provides comfort.
Moderation in financial risk profile The company has availed debt to fund capex, which led to moderation in net debt to Ebitda ratio to 3.7 times as on March 31, 2022, against 2.7 times a year earlier. Interest coverage ratio remain moderate despite improving to 3.1 times as on March 31, 2022 against 2.8 times as on March 31, 2021. Interest coverage, however, is expected to improve from fiscal 2024 due to increase in Ebitda which will further improve from fiscal 2025 onwards due to incremental accruals from additional capacity.
Susceptibility to risks relating to input costs, realisations and cyclicality in 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 susceptible to volatility in input prices, including raw material, power, fuel and freight. Increase in coal and pet coke prices in fiscal 2022 impacted the profitability of several cement players. Realisations and profitability were also affected by demand, supply, offtake and regional factors. The company also remains exposed to fluctuations in fuel and cement prices. |
Liquidity: Strong The liquidity of UCWL derives strength from the overall liquidity of JKLC. Cash and liquid surplus stood at Rs 41 crore as on September 30, 2022, with minimal utilisation of the fund-based working capital facility (sanctioned limit of Rs 30 crore). The parent is undertaking capex of around Rs 1,650 crore over fiscals 2022 to 2024 in UCWL, which is expected to be financed through debt of Rs 1,100 crore, rights issue in UCWL of Rs. 400 crore and internal accrual of Rs 150 crore. Bank lines are expected to comfortably meet working capital requirement. |
Outlook: Stable UCWL will continue to benefit from the strong linkages with its parent despite moderation in the standalone credit risk profile. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company UCWL, incorporated in 1993, is an integrated cement player with clinker capacity of 1.5 MTPA and cement grinding capacity of 2.2 MTPA as on December 31, 2022. The plant is located in Udaipur (Rajasthan). UCWL also has 6 MW WHRS and 10 MW solar power plant thus meeting 45% of the power requirement from renewable sources.
UCWL became subsidiary of JKLC in fiscal 2014 post JKLC increased its stake from ~27% (bought in fiscal 2013 to 71% by way of fresh equity infusion, as per terms of The Board for Industrial and Financial Reconstruction (BIFR) sanctioned rehabilitation scheme. As on December 31, 2022, JKLC held 72.54% stake in UCWL.
As on September 30, 2022, UCWL reported profit after tax (PAT) of Rs 15.7 crore and operating income of Rs 498.2 crore, against Rs 27.1 crore and Rs 413.8 crore, respectively, for the corresponding period of fiscal 2021. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 31-Jan-2023 in line with the lender-wise facility details as on 02-Nov-2021 received from the rated entity.
Criteria Details
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