Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Everest Industries Limited (Everest) at ‘CRISIL A+/Stable/CRISIL A1’. CRISIL Ratings has also withdrawn its rating of ‘CRISIL A1+’ on Rs 30 crore commercial paper at the company’s request and on independent confirmation that there is no amount outstanding. The withdrawal is in line with CRISIL Ratings’ policy on withdrawal of ratings.’.

During first nine months of fiscal 2022, company’s top-line grew by 14% over the corresponding period last fiscal due to recovery in demand for Building products and Pre-engineered buildings (PEB) segment. Profitability margins however declined by ~320 bps at 6.4%, notwithstanding various cost improvement measures, due to high commodity prices and freight costs. CRISIL Ratings 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 8-10% over the medium term. Operating margin is expected to remain stable at 7-8%, supported by volume benefits and continued cost control measures.

Financial risk profile remains healthy, supported by absence of debt on its books; company prepaid its long-term debt and remains debt free since January 2021. With steady accruals, modest capex of Rs 20-25 crore per annum 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 65 crore and unutilised bank limit of Rs 130 crore as on December 31, 2021.

The ratings continue to reflect Everest's established position in the domestic AC roofing 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).

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 37 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). However, in first nine months of fiscal 2022, the AC roofing segment did account for 74% of revenue (as compared to 66% in fiscal 2020) due to tepid industrial activity and hold on capital spends adversely affecting the PEB business. However, with ongoing rise in steel prices, AC roofing serves as a cheaper substitute. Once steel prices stabilize and industrial construction activity picks up, the PEB business should gain pace. 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 of around Rs 506 crore and debt free capital structure, as on March 31, 2021. Everest had prepaid its long-term debt of around Rs 50 crore during November 2020. While the company is not expected to avail any substantial debt in the medium term and with steady accretion of profit, debt protection metrics are expected to remain healthy. Better operating performance, continued modest capital expenditure (capex), and efficient working capital management should support healthy financial risk profile over the medium term

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 fibre 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 more than 60-70% 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.

Annexure – List of Entities Consolidated

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