Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Everest Industries Limited (Everest) at ‘CRISIL A+/Stable/CRISIL A1’.

 

During first nine months of fiscal 2023, company’s top-line grew by 21% over the corresponding period last fiscal due to recovery in demand for asbestos cement (AC) roofing products and demand influx of PEBs in their steel business segment due to pent-up demand post pandemic. Operating margins however declined by ~120 bps at 4.8% during 9M of fiscal 2023 compared to same period of the previous fiscal, notwithstanding various cost improvement measures, due to high commodity prices and freight costs. CRISIL expects demand recovery to be better over the medium term with normalisation of rural housing construction, and industrial construction activities. CRISIL Ratings expects revenue to grow by 10-12% over the medium term. Operating margin is expected to remain stable at 5-7%, supported by volume benefits and continued cost control measures.

 

Financial risk profile remains healthy as on date, supported by absence of debt on its books; company prepaid its long-term debt and remains debt free since January 2021. However, company has announced capex plans of Rs 312 crores for which debt shall be taken to the tune of ~ Rs 230 to 250 crores as informed by the management. With steady accruals and prudent working capital measures, financial risk profile is expected to remain healthy over the medium term. Liquidity is further supported by liquid funds of ~ Rs 16 crore and partially unutilised bank limit (~ Rs 57 crores utilised out of Rs 130 crore) as on December 31, 2022.

 

The ratings continue to reflect Everest's established position in the domestic AC roofing and Boards & Panel market, its diversified revenue mix and adequate financial risk profile. These strengths are partially offset by exposure to intense competition in the AC roofing and PEB businesses in India, and volatility in operating margin. Besides, the AC roofing business is subject to regulatory risks pertaining to the manufacture/use of asbestos in India, and key asbestos-producing nations (as the raw material is fully imported).

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Everest and its wholly owned subsidiary - Everest Building Products (Mauritius).

 

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:

• Established position in the domestic AC roofing segment:

Backed by track record of 85 years and a wide pan-India reach, Everest is one of India’s largest manufacturers of AC roofing sheets. It has a well-established brand in the rural market, supported by a strong distribution network of about 7,000 retail outlets and over 32 sales depots. Strategic location of plants across the country help enhance overall market reach and enable the group to compete effectively with regional players. This is reflected in its increased market share over the past two years.

 

• Diversified revenue mix:

Over the past 6-7 years, Everest has diversified its revenue mix, driven by sustained improvement in the PEB business and reduced contribution from the AC roofing business (which accounted for the entire revenue in fiscal 2008). In first nine months of fiscal 2023, the AC roofing segment accounted for 69% of revenue (as compared to 77% in fiscal 2022) due to grown industrial activity and pent-up demand post pandemic favourably impacted the PEB business (share in revenue grown to 31% as compared to 23% in fiscal 2022). As the global steel prices are expected to stabilize in the calendar year 2023, domestic steel prices are expected to soften by 2-4%. Company is expected to benefit in the short term due to stabilising steel prices. Nevertheless, AC roofing is likely to remain the mainstay of the business, over the medium term.

 

• Healthy financial risk profile

Financial risk profile is marked by a healthy networth estimates of ~ Rs 570 crore and debt free capital structure for the fiscal 2023. Everest had prepaid its long-term debt of around Rs 50 crore during January 31, 2021. However, company has announced capex plans of Rs 312 crores for which debt shall be taken to the tune of ~ Rs 230 to 250 crores as informed by the management. With steady accruals and prudent working capital measures, financial risk profile is expected to remain healthy over the medium term. Liquidity is further supported by liquid funds of ~ Rs 16 crore and partially unutilised bank limit (~ Rs 57 crores utilised out of Rs 130 crore) as on December 31, 2022.

 

Weaknesses:

• Dependence on rural spending, and exposure to intense competition from peers and substitute products:

Demand for AC roofing is derived from household construction in rural areas and investment in industrial construction. This exposes the Everest group to fluctuations in rural purchasing power and change in economic cycles. The group also faces intense competition not only from other strong AC roofing players but also from manufacturers of galvanised iron (GI) roofing sheets that are seen as a viable alternative. Any sharp decline in price of GI sheets will impact demand for AC sheets.

 

Prices of key raw materials for AC roofing and PEBs - asbestos and steel, respectively - form ~50-60% of the total input cost; hence, the operating margin remains vulnerable to any sharp price volatility or currency fluctuations. Movement in input prices in the PEB business are passed on to end-customers, only when permitted by contracts, however ability to pass through costs in BP segment is low.

 

While diversification into steel buildings will reduce concentration, the AC sheet business in India will remain the mainstay over the medium term.

 

• Exposure to regulatory ban on manufacture or use of asbestos in end-user markets and key asbestos-producing nations

As sale of all roofing products account for around 50% of revenue, the company remains vulnerable to risk of a ban on mining and use of asbestos in Russia and Kazakhstan (the largest exporters of the mineral). Brazil and Canada, which were among the world's largest producers, have already banned mining and sale of asbestos in 2017 and 2018, respectively. This led to a spike in asbestos prices. In India too, only white asbestos (known as chrysotile) fibre is used, as blue and brown asbestos have been banned. Furthermore, all forms of asbestos mining is banned in the country. Regulatory changes concerning asbestos mining and usage will remain a key monitorable.

Liquidity: Adequate

Liquidity is marked by sufficient liquid funds, cash accrual and minimal reliance on debt. Cash accrual of Rs 55-90 crore (including fiscal 2023) is expected per fiscal over the medium term, sufficient to cover maintenance capex and incremental working capital expenses. Liquid surplus stood at Rs 16 crore as on December 31, 2022. Bank limit of Rs 130 crore was utilised only at an average 13% during the 12 months through January 2023. Due to comfortable leverage, there is sufficient headroom to raise additional debt for the proposed capex.

Outlook: Stable

CRISIL Ratings expects sustained improvement in Everest’s business risk profile, aided by stable demand from affordable housing and higher demand in the steel buildings segment. Financial risk profile should also remain stable, due to adequate capital structure, steady cash generation and prudent working capital management.

Rating Sensitivity factors

Upward factors

• Healthy revenue growth and improvement in operating profitability to over 9-10% on a sustained basis.
• Sustaining comfortable capital structure and other key credit metrics along with healthy liquidity.

 

Downward factors

• Lower-than-expected accrual due to weakening of business performance leading to a decline in operating margins to less than 3-4%.
• Significant increase in debt due to higher-than expected capex or stretched working capital cycle, leading to a sharp weakening of gearing.

About the Company

Incorporated in 1934, Everest is one of India's largest manufacturers of AC roofing. The company has also diversified into non-asbestos building products (roofing sheets, flooring, cladding, and other boards); and design, manufacture, and erection of PEBs. It has eight plants across India.

 

Income from AC roofing and non-asbestos building products currently accounts for around 69% of total revenue, while the PEB segment accounts for the balance. The company has an installed production capacity of 950,000 tonne per annum (tpa) for conventional building products (including AC roofing) and 72,000 tpa for PEBs. Promoters held 50.6% stake as on March 31, 2022, followed by Bodies Corporate with 7.64%, foreign institutional investors with 5.22%, mutual funds/ UTI with 0.18% and; the balance was with the public and others.

 

For the nine months ended December 31, 2022, revenue was Rs 1201 crore and PAT Rs 29 crore, against Rs 990 crore and Rs 38 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

As on March 31,	Unit	2022	2021
Revenue	Rs .Cr	1365	1218
PAT	Rs. Cr	44	56
PAT margin	%	3.2	4.67
Adjusted debt/adjusted networth	Times	-	-
Interest Coverage	Times	24.23	37.37

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon rate (%)	Maturity Date	Issue size (Rs Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	150.0	NA	CRISIL A+/Stable
NA	Letter of Credit*	NA	NA	NA	290.0	NA	CRISIL A1

*Fully Interchangeable with bank guarantee

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Everest Industries Limited	Full	Parent
Everest Building Products (Mauritius)	Full	Subsidiary