Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of JK Cement Limited (JKCL).

 

The rating continues to reflect the healthy business risk profile of JKCL, backed by its position as one of the largest white cement and wall putty manufacturers in India; established market position in grey cement in the northern region; backward integration leading to cost-efficient operations; and strong financial risk profile driven by healthy liquidity. These strengths are partially offset by exposure to risks relating to project implementation and susceptibility to fluctuations in input costs and realisations, and cyclicality in the cement industry.

 

Consolidated operating income grew 21% in fiscal 2023 driven by volume growth and higher realization to partially pass-on the rise in input costs. Earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne weakened to Rs 804 in fiscal 2023 from Rs 1,099 in fiscal 2022 due to industry wide rise in input cost, especially power and fuel cost, which the company was not able to fully pass on. In the first half of fiscal 2024, consolidated operating income increased 22.4% year on year on account of a 27.2% increase in sales volume while realisation decreased by 3.8%. Ebitda per ton reduced by Rs 42 to Rs 954 during the same period owing to decrease in realization. For fiscal 2024, sales volume is likely to grow at a healthy pace supported by healthy demand from infrastructure and housing.

 

The company has commissioned grey cement capacity of 7.5 million tonnes per annum (MTPA) fiscal 2023 onwards. It has aided in augmenting its position in the fast-growing central region where the company has added majority of the above capacity. Further, considering the company’s target to reach grey cement capacity of 30 MTPA over medium term from current grey cement capacity of 22.17 MTPA, capital expenditure (capex) is expected to increase going forward.

 

However, despite increase in capex, the financial risk profile is expected to remain healthy aided by cost optimization measures undertaken by the company and incremental accruals from the newly commissioned capacity. Financial leverage, as measured by net debt to Ebitda is expected to reduce from 2.5 times in fiscal 2023 to below 2 times fiscal 2025 onwards. Further, liquidity is supported by strong cash and equivalents of more than Rs 1,200 crore maintained over the past three years.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JKCL and its associate and subsidiary companies as they are in similar lines of business and have strong financial, managerial and operational linkages.

 

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:

Market leadership in white cement and wall putty segment along with established market position in grey cement segment in northern region

JKCL is one of the largest manufacturers of white cement (including wall putty) in India and one of leading manufacturer of white cement globally, with total white cement capacity of 1.48 MTPA (including UAE operations of 0.6 MTPA) and wall putty capacity of 1.33 MTPA. The white cement market in India is a duopoly, with high entry barriers that keep competitive intensity low.

 

JKCL had installed grey cement capacity of 22.17 MTPA as on December 31, 2023 which has increased from 14.67 MTPA as on March 31, 2022. This has enabled it to become the sixth largest grey cement player in the country. It is one of the prominent players in the northern region along with diverse presence across south, west and central region with plants across Rajasthan, Gujarat, Karnataka, Haryana, Uttar Pradesh and Madhya Pradesh. It has commissioned 7.5 MTPA capacity in the past two years primarily in the central region which has augmented its market position. The ongoing expansion of 2.0 MTPA in the Prayagraj (Uttar Pradesh) will further diversify its geographical presence.

 

Backward integration leading to cost efficiency

JKCL sources limestones (key raw material) from various captive mines adjacent to the integrated plants. It has mines in Rajasthan, Karnataka and Madhya Pradesh, having mining lease atlest till 2030. Its reserves are sufficient for existing operations as well as expansion planned over the medium term. Further, as on March 31, 2023, the company had captive power capacity of 191.65 megawatts (MW) (including waste heat recovery system [WHRS] of 42.3 MW and solar/wind power of 46.85 MW). This has enabled it to meet 66% of the power requirement captively in the first half of fiscal 2024. The strategic location of the plants ensures competitive freight cost. Proximity to raw materials, captive power and competitive freight costs will continue to ensure high-cost efficiency over the medium term.

 

Healthy financial risk profile

Financial leverage as measured by net debt to Ebitda increased in fiscal 2023 owing to weakening of profitability as input price remained high which coincided with increase in debt funded capex undertaken by the company. The ratio is expected to reduce in fiscal 2024 with easing of input prices along with incremental accruals from newly commissioned facilities. It will further fall below 2 times fiscal 2025 onwards aided by higher accruals.

 

Debt protection metrics remain healthy with adjusted interest coverage ratio expected to be over 4 times and net cash accruals to adjusted debt of 0.2 time. Debt protection metrics are likely to improve fiscal 2025 onwards as ramping up of the recently commissioned capacity in Ujjain (Madhya Pradesh) and expected commissioning of capacity in Prayagraj in the second quarter of fiscal 2025 would positively contribute to profitability. Liquidity should remain healthy, with cash and equivalent above Rs 1,650 crore as on September 30, 2023.

 

Weaknesses:

Exposure to project-related risks

The current capacity expansion of 2 MTPA in Prayagraj is expected to be completed by the second quarter of fiscal 2025 at a cost of Rs 490 crore to be funded with debt of Rs 300 crore and the remaining with cash accruals. It has incurred capex of Rs 61 crore till the second quarter of fiscal 2024. Further, JKCL has a target to reach grey cement capacity of 30 MTPA over the medium term. While the company has not announced any fresh capex plans yet, it is expected to continue with capex considering its capacity target. Thus, the project will continue to be exposed to risks related to execution and the ability to ramp up new capacity. However, the company’s track record of timely completion of projects of such scale mitigates the project execution risk to a large extent which is further substantiated by timely ramp up of capacity added in the past two years.

 

Susceptibility to risks relating to input costs, realisations and cyclicality in the 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 led to unfavourable price cycles for the sector in the past. Moreover, profitability remains exposed to volatility in input prices, including raw material, power, fuel and freight. Increase in coal and petcoke prices in the second half of fiscal 2022 and during fiscal 2023 impacted the profitability of all cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors.

Liquidity: Strong

Healthy net cash accrual of Rs 1,000-1,300 crore per annum for fiscals 2024 and 2025 are more than adequate to meet the yearly scheduled debt obligation. Further JKCL has cash and equivalents of more than Rs 1,650 crore as on September 30, 2023, which is likely to be maintained at healthy levels over the medium term as well. Fund-based working capital limit was utilised at an average of 20% for the six months ended October 31, 2023.

 

Environment, social and governance (ESG) profile 

CRISIL Ratings believes the ESG profile of JKCL supports its already strong credit risk profile.

 

The cement sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption as cement manufacturing process is energy intensive and its high dependence on natural resources such as limestone and coal as key raw materials. The sector has social impact due to its nature of operations affecting local community and health hazards involved.

However, JKCL has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights of JKCL: 

• JKCL aims to achieve gross greenhouse gas (GHG) emissions (Scope 1 + Scope 2) target of 532kg CO2 (carbon dioxide) per tonne cementitious material (SBTi) by 2030. It stood at 565 kg CO2 per tonne in fiscal 2023.
• JKCL is targeting net GHG Scope 1 target of 465 kg CO2 per tonne cementitious material (GCCA) by 2030. It stood at 520 kg CO2 per tonne in fiscal 2023.
• JKCL has estimated an Internal Carbon Price (ICP) of USD 19 per tCO2e (tonnes of carbon dioxide equivalent) for all its businesses to better manoeuvre in the dynamic regulatory environments.
• The company has green energy (renewable energy and WHRS) mix target of 75% of total energy requirement and achieve thermal substitution rate (TSR) of 35% by 2030. It’s share of green energy and TSR stood at 44% and 13.95%, respectively, in fiscal 2023
• It aims to achieve 5 times water positive by 2030. It achieved water positivity of 4.5 times in fiscal 2023. JKCL also offers monetary rewards for any innovative projects that reduce water consumption.
• JKCL has a target to achieve 5% gender diversity by 2030.
• The governance structure is characterised by 50% of the board members being independent directors. The company’s chairman and executive positions are also split. 

 

There is a growing importance of ESG among investors and lenders. JKCL’s commitment to ESG will play a key role in enhancing stakeholder confidence and access to capital markets.

Rating Sensitivity Factors

Downward Factors

• Business risk profile weakens, resulting from loss of market share along with Ebitda/ton declining below Rs 700 on a sustained basis.
• Higher than expected debt-funded capex or acquisition or decline in profitability levels resulting in net debt to Ebitda of more than 3 times on a sustained basis

About the Company

JKCL is part of the JK Organisation and was promoted by the late Dr Gaur Hari Singhania and his son, the late Mr Yadupati Singhania. The company is presently headed by Dr Raghavpat Singhania (Managing Director) and Mr Madhavkrishna Singhania (Deputy Managing Director and Chief Executive Officer).

 

JKCL commenced operations in May 1975 with commercial production at its flagship grey cement unit at Nimbahera, Rajasthan. The company has installed grey cement capacity of 22.17 MTPA along with total white cement capacity of 1.48 MTPA (including UAE capacity) and wall putty capacity of 1.33 MTPA as on December 31, 2023. It had captive power capacity of 191.65 MW as on March 31, 2023, which includes a captive power plant of 102.50 MW, WHRS of 42.3 MW and solar & wind power of 46.85 MW.

 

In March 2022, the company announced to foray into the paint business with investment of Rs 600 crore spread over five years. In line with the same, it has acquired 100.0% stake in Acro Paints Ltd in tranches through wholly owned subsidiary J.K. Maxx Paint Ltd. This will enable JKCL to provide a bouquet of products and increase market share through synergies from its network of dealers and painters.

 

In the first half of fiscal 2024, JKCL generated consolidated operating income of Rs 5,515 crore and profit after tax (PAT) of Rs 292 crore compared with Rs 4,506 crore and Rs 272 crore, respectively, in the corresponding period of fiscal 2023.

Any other information: Not Applicable

Annexure - List of Entities Consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
J.K. Cement (Fujairah) FZC	Full	Significant operational and financial linkages
J.K. Cement Works (Fujairah) FZC	Full	Significant operational and financial linkages
J.K. White Cement (Africa) Ltd	Full	Significant operational and financial linkages
J.K. Maxx Paint Ltd (Erstwhile J.K. Paints & Coatings Ltd)	Full	Significant operational and financial linkages
Acro Paints Ltd	Full	Significant operational and financial linkages

Jaykaycem (Central) Ltd, wholly owned subsidiary of JKCL, is amalgamated with the company w.e.f August 1, 2023