Detailed Rationale

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

 

Revenue from the building products (BP) segment remained almost flat at Rs 1,154 crore in fiscal 2024 (against Rs 1,138 crore in fiscal 2023), while that from the steel business (SB) segment declined to Rs 421 crore (Rs 509 crore) owing to low order booking and execution in the first two quarters of the fiscal. Overall revenue declined by about 4% to Rs 1,575 crore in fiscal 2024, as compared to Rs 1,648 crore in fiscal 2023.

 

The operating margin also reduced to 2.7% in fiscal 2024 (from 4.1% in fiscal 2023), led by low absorption of fixed cost due to reduction in revenue from the SB segment, thereby leading to decline in optimal utilisation of the capacity.

 

Operating performance improved in the first quarter of fiscal 2025, with revenue increasing to Rs 522 crore from Rs 484 crore in the same period last fiscal; the operating margin also rose to 5.1% from 4.2%. Improvement in order book and execution for the SB segment will support revenue and profitability due to better operating leverage over the medium term.

 

The operating margin is expected to improve further, going forward, driven by benefits of diversifying the supply chain for asbestos, a critical raw material for the roofing business under the BP segment. This will be achieved through the implementation of measures to adapt the use of materials sourced from diversified geographies in the plant and benefits of cost-savings initiatives.

 

Healthy double-digit revenue growth and improvement in profitability (earnings before interest, taxes, depreciation and amortisation margin sustaining above 6%) will remain monitorable going forward.

 

Financial risk profile remains healthy, supported by low leverage. Despite plans of availing debt worth ~Rs 150 crore for funding capital expenditure (capex) of Rs 312 crore, the financial risk profile is expected to remain comfortable with an expectation of net cash accrual to adjusted debt ratio to remain above 0.5 time and interest coverage ratio at more than 7 times over the medium term.

 

The ratings continue to reflect EIL's established position in the domestic asbestos cement (AC) roofing and boards and 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 pre-engineered buildings (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) and the same remains monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of EIL and its wholly owned subsidiaries.

 

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 nine decades and a wide pan-India reach, EIL 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 9,000 retail outlets and over 27 sales depots. Strategic location of plants across the country help enhance overall market reach and enable the company 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, EIL has diversified its revenue mix, driven by sustained improvement in the SB segment and reduced contribution from the BP segment (which accounted for the entire revenue in fiscal 2008). In fiscal 2024, the BP segment accounted for 73% of revenue (as compared to 69% in fiscal 2023) due to higher industrial activity and low order inflows adversely impacting the PEB business of the SB segment (share in revenue dropped to 27% in fiscal 2024 as compared to 31% in fiscal 2023). Nevertheless, the BP segment is likely to remain the mainstay of the business over the medium term.

 

• Healthy financial risk profile: Financial risk profile is marked by healthy networth of ~Rs 600 crore and gearing of 0.1 time as on March 31, 2024. The company has announced capex of Rs 312 crore, for which debt of Rs 160-170 crore shall be undertaken as informed by the management. A capex of Rs 125 crore in the boards and panels plant (of the total Rs 187 crore) was incurred in fiscal 2024 and debt of Rs 65 crore has been availed till the first quarter of fiscal 2025. The production in the boards and panels plant has commenced and the same for the PEB plant is expected in fiscal 2026. With steady cash accrual and prudent working capital management, financial risk profile is expected to remain healthy over the medium term. Liquidity is further supported by liquid funds of ~ Rs 65 crore and moderately utilised bank limit (~ Rs 237 crore utilised out of Rs 440 crore) as on June 30, 2024.

 

Weaknesses:

• Dependence on rural spending and exposure to intense competition and substitute products: Demand for AC roofing is derived from household construction in rural areas and investment in industrial construction. This exposes the Everest company to fluctuations in rural purchasing power and change in economic cycles. The company 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 as seen in the recent past. However, the company has started sourcing asbestos from suppliers in Brazil and Kazakhstan apart from the older supplier in Russia which will help the company in keeping the raw material prices in check. Overall, ability of the company to pass on increase raw material costs to end customers remains low in the BP segment. Some contracts in the SB business have price escalation clauses. However, a large number of contracts are fixed priced in nature and may impacting profitability in case of sudden spikes in input cost.

 

• 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 50% of revenue, the company remains vulnerable to risk of a ban on mining of asbestos in Russia, Brazil and Kazakhstan (the largest exporters of the mineral) and use of the same in end-user market. Canada, which was among the world's largest producers, has already banned mining and sale of asbestos in 2018. 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 are banned in the country. Regulatory changes concerning asbestos mining and usage will remain monitorable.

Liquidity: Adequate

Liquidity is marked by sufficient liquid funds, cash accrual and minimal reliance on debt. Cash accrual of Rs 60-120 crore is expected per fiscal, sufficient to cover project capex and incremental working capital expenses over the medium term. Liquid surplus stood at Rs 65 crore as on June 30, 2024. Bank limit of Rs 440 crore was utilised at 53% during the six months ended June 30, 2024. Due to comfortable leverage, there is sufficient headroom to raise additional debt for the proposed capex.

Outlook: Stable

EIL’s business risk profile will remain healthy, aided by stable demand from affordable housing and higher capacity utilisation 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 operating profitability improving to over 9-10% on a sustained basis
• Sustaining comfortable capital structure along with healthy liquidity

 

Downward factors:

• Weakening of business performance and inability to achieve operating margin above 6%, resulting in lower-than-expected cash accruals on sustained basis
• Significant increase in debt due to higher-than-expected capex or sizeable stretch in the working capital cycle, leading to a sharp rise in gearing
• Any regulatory change restricting ability of the company to manufacture and sell asbestos products

About the Company

Incorporated in 1934, EIL is one of India's largest manufacturers of AC roofing. The company has also diversified into non-asbestos BP (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 BP currently accounts for around 73% of total revenue, while the PEB segment accounts for the balance. The company has an installed production capacity of 985,000 tonne per annum (TPA) for conventional BP (including AC roofing) and 54,000 TPA for PEBs.

 

Revenue was Rs 1,575 crore and profit after tax (PAT) was Rs 18 crore for fiscal 2024, against Rs 1,648 crore and Rs 42 crore, respectively, for the previous fiscal.

Any other information: Not Applicable