Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable/CRISIL A1+’ ratings to the bank facilities of Udaipur Cement Works Ltd (UCWL).

 

The ratings reflect strategic importance of UCWL to JK Lakshmi Cement Ltd (JKLC; ‘CRISIL AA/FAA+/Stable/CRISIL A1+') and the strong support it receives from JKLC. The ratings also consider UCWL's turnaround in operating performance and its high financial flexibility. These strengths are partially offset by average debt protection metrics, debt-funded capital expenditure (capex) and susceptibility to input costs and cyclicality in the cement industry.

 

Operating income grew by around 7% during fiscal 2021, driven by higher sales volume (up by 7%) and firm realisations, despite operations being hit by the pandemic at the start of the fiscal. Profitability, as measured by earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne, continues to improve further (around Rs 730 per tonne in fiscal 2021, Rs 653 per tonne in fiscal 2020 and Rs 241 per tonne in fiscal 2019) owing to healthy realisation and benign input cost. Volume may grow more strongly in fiscal 2022 owing to the low base of fiscal 2021, expected pick-up in infrastructure demand and also supported by recently concluded capacity expansion. While the EBITDA per tonne would moderate because of rising input cost, improving realisations would partly offset this.

 

Turnaround in operations in the last two fiscals led to substantial improvement in the financial risk profile, as seen in net debt (gross debt less cash and cash equivalent) to EBITDA ratio of 2.7 times for fiscal 2021 against 3.9 times for fiscal 2020 and 12.9 times for fiscal 2019. The financial risk profile is expected to moderate over the medium term owing to drawdown of debt to fund the brownfield capex, while its contribution to revenue and profitability would meaningfully accrue from fiscal 2025 onwards.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has applied its criteria for notch-up of rating based on parent support. Outstanding preference shares, both cumulative redeemable preference shares and optionally convertible cumulative redeemable preference shares, are treated as equity due to vested options to convert the preference shares to equity and long tenor of 18-20 years in case of redemption.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from parent

JKLC has high operational, managerial and financial integration with its subsidiary, UCWL. The parent has consolidated its position in its key market of North and western India with the addition of UCWL's assets, as the latter forms around 16% of the combined capacity of 13.9 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 position which is held by JKLC’s vice chairman & managing director. The company also been using the stronger and established brand from the parent 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. JKLC has also extended a corporate guarantee for 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 flyash are done at a group level, thus benefiting UCWL from JKLC’s scale of operations. Inter-company business transactions between UCWL & JKLC pertaining to purchase and sale of cement/clinker indicate rationalisation of the overall cost at group level.

 

UCWL is likely to remain strategically important to JKLC and thus will continue receiving strong management, operational and financial support from the parent. However, the rating of UCWL will remain sensitive to the credit rating of JKLC.

 

• Turnaround in UCWL’s operating and financial risk profile

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. UCWL reported losses during fiscals 2018 and 2019 owing to initial stabilisation phase post which the company significantly scaled up volumes and profitability. UCWL’s absolute EBITDA increased to Rs 149 crore during fiscal 2021 compared to Rs 125 crore in fiscal 2020 and Rs 40 crore in fiscal 2019. Turnaround in operating performance strengthened the financial risk profile, reflected in net debt to EBITDA ratio improving to 2.7 times in fiscal 2021 from 3.9 times in fiscal 2020 and 12.9 times in fiscal 2019. Although net debt to EBITDA improved from historical levels, they remain high resulting in moderate debt protection metrics; interest coverage ratio was 2.81 times for fiscal 2021 and net cash accruals to total (NCATD) debt was 0.18 times for the same corresponding fiscal. UCWL has comfortable liquidity of Rs 120 crore as on September 30, 2021 and negligible fund-based working capital utilisation.

 

Weaknesses:

• Project implementation risksParent (JKLC) announced a brownfield capacity expansion (capex) to be undertaken in UCWL, for setting up a 1.5 MTPA clinker capacity, 2.5 MTPA of grinding capacity, along with waste heat recovery system (WHRS) plant and railway sidings. The overall project cost is estimated at around Rs 1,650 crore and is to be funded through debt of Rs 1,100 crore (to be guaranteed by JKLC) and the balance through internal accrual and equity infusion from JKLC. The commissioning is expected to take around three years from the start of the project. Given the size of project, the company is exposed to execution risks and ability to ramp up new capacity. Hence, timely commencement of commercial operations, within budgeted costs, will remain a key monitorable. However, JKLC’s past track record of successfully completing various capacity addition projects provides comfort.

 

• 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 the numerous players adding capacity during the peak of a cycle. This 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 pet coke prices in fiscal 2019 impacted profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors.

Liquidity: Strong

Liquidity of UCWL derives strength from the overall liquidity of JKLC. Cash accrual is projected at around Rs 90 crore in fiscal 2022, as against Rs 38 crore of long-term debt repayment obligation. Cash and liquidity stood at Rs 120 crore as on September 30, 2021 with minimal utilization of the fund-based working capital facility (sanctioned limit of Rs 30 crore). The parent is undertaking a capex of around Rs 1,650 crore over fiscals 2022 to 2025 in UCWL, expected to be financed through debt of Rs 1,100 crore, equity infusion from JKLC and internal accrual. Bank lines are expected to comfortably meet the incremental working capital requirement.

Outlook: Stable

UCWL will continue to benefit from strong linkages with its parent, along with improving standalone credit risk profile

Rating Sensitivity Factors

Upward factors:

*Upward revision in JKLC long-term rating by one or more notch

*Significant improvement in UCWL’s operating performance and financial flexibility.

 

Downward factors:

*Downward revision in JKLC’s long-term rating by one or more notch and/or material change in shareholding of JKLC or support philosophy toward UCWL

*Significant deterioration in UCWL’s operating performance

*Significant time & cost overrun in the brownfield expansion plan

About the Company

UCWL, incorporated in 1993, is an integrated cement producer with clinker capacity of 1.6 MTPA and grinding capacity of 2.2 MTPA as on September 30, 2021. The plant is located in Udaipur (Rajasthan). UCWL also has 6 megawatt (MW) WHRS and 10 MW solar power plant thus meeting 48% of the power requirement from renewable sources.

 

UCWL became subsidiary of JKLC in fiscal 2014 post latter increased its stake from 27.7% (bought in fiscal 2013) to 75.5% by infusion of fresh equity, as per terms of the Board for Industrial and Financial Reconstruction-sanctioned rehabilitation scheme. As on September 30, 2021 JKLC holds 72.54% stake in UCWL.

 

For the six months ended September 30, 2021, UCWL reported profit after tax (PAT) of Rs 27.05 crore and operating income of Rs 413.81 crore, against Rs 17.39 crore and Rs 333.06 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable