Rating Rationale
July 31, 2020 | Mumbai
Nuvoco Vistas Corporation Limited
Long-term rating removed from 'Watch Developing'; short term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.2950 Crore
Long Term Rating CRISIL AA/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.3000 Crore Non Convertible Debentures CRISIL AA/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Rs.350 Crore Non Convertible Debentures CRISIL AA/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Rs.1600 Crore Non Convertible Debentures CRISIL AA/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Withdrawn)
Rs.600 Crore Perpetual Non Convertible Debentures CRISIL AA-/Negative (Removed from 'Rating Watch with Developing Implications'; Rating Reaffirmed)
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its rating on the long term bank facilities and long term debt instruments of Nuvoco Vistas Corporation Ltd (NVCL) from 'Rating Watch with Developing Implications' and reaffirmed the rating at 'CRISIL AA', 'CRISIL AA-' and assigned a 'Negative' outlook. CRISIL has reaffirmed is short-term facilities and commercial paper at 'CRISIL A1+'. CRISIL has also withdrawn its rating on NCDs of Rs 1600 crore as the same have been fully redeemed based on the request from client and independent confirmation from debenture trustee. The withdrawal is in-line with CRISIL`s withdrawal policy. 
 
The rating action follows the announcement of the completion of the acquisition of Nu Vista Ltd (NVL) (formerly known as Emami Cement Ltd) by NVCL. The negative outlook signifies the possibility of weakening of financial risk profile of NVCL on account of the increase in the leverage levels to fund the acquisition. However, the group has deleveraging plans by the end of fiscal 2021 or early fiscal 2022 through an equity issuance at NVCL, which shall improve financial flexibility of the Nirma group. Any substantial delays in the same remains a key rating sensitivity.

The enterprise value of Rs. 5265 crore had been funded through debt of around Rs 1,330 crore, equity infusion of around Rs 1,161 crore from Niyogi Enterprise Pvt Ltd (NEPL rated CRISIL AA-/Negative), private equity investment of Rs 500 crore, standalone debt of Rs 2,044 crore at NVL and rest through Nuvoco's accruals.  

The large incremental debt constrains NVCL's financial risk profile over the medium term, as its consolidated net debt to earnings before interest depreciation tax and amortisation (EBIDTA) ratio has risen to over 4 times with this transaction. However, strong market position in Eastern India, diversification in North India and sound operating efficiency with above-average per tonne operating profitability is expected to improve the cash flows. Cost optimization initiatives (including the setting up of captive power plants [CPP], waste heat recovery systems [WHRS], and debottlenecking of existing capacities) in the existing business and expected ramp up of acquired assets along with deal synergies (product premuimisation and logistic synergies) shall also support the cash flows. Supported by these cash flows, CRISIL expects the consolidated net debt to EBIDTA ratio to subsequently moderate to around 2.0 times by fiscal 2022. However, any delay in this will be a key rating sensitivity factor. Also NVCL enjoys healthy financial flexibility being part of the Nirma group; the financial flexibility is expected to be supported by the deleveraging plans of Nirma group over the near term through an equity issuance at NVCL.

However, due to the lockdown measures undertaken over the last two months, the cashflows for the company had witnessed moderation which is in line with the impact on the entire industry. The production facilities of the company operated at lower capacity utilisation due to supply and demand constraints on account of the lockdown. NVCL and NVL has combined sanctioned limits of over Rs 750 crore against which unutilized lines shall be about Rs 300-350 crore backed by adequate drawing power. Company also has cash and equivalents of about Rs 300 crore which supports liquidity. A sustained period of subdued utilisation can significantly deteriorate the cash flows and remains monitorable. On the other hand, a faster reversal to normalcy may contain the extent of deterioration in the cash flows.

Nirma transferred 100% stake in NVCL to NEPL in fiscal 2020.  However, NVCL shall continue to enjoy financial flexibility from being a part of the Nirma group and financial oversight from the Nirma group would continue on NVCL.

These strengths are partially offset by a constrained financial risk profile, and susceptibility to variations in input costs and cyclicality in the cement industry.

Analytical Approach

For arriving at the ratings, CRISIL has consolidatedthe business and financial risk profiles of NVCL and NVL.

CRISIL has accorded 50% equity content to the perpetual NCDs of Rs 600 crore transferred to NVCL as part of the Cement Undertaking (as defined in the Scheme of Arrangement). This implies that in CRISIL's analysis of the capital structure and financial ratios, 50% of the principal amount is treated as equity and the remaining as debt. CRISIL has rated the perpetual NCDs one-notch lower than the other traditional long-term bonds, in line with its criteria for rating corporate sector hybrids. This is based on the instrument's feature that allows flexibility to defer distribution payments and the likelihood of deferral, if required.

The rationale for an 'intermediate equity content' stems from the long tenure of the instrument, presence of a strong and legally binding replacement capital covenant (RCC) that enhances permanence of equity, and its subordinate position in the capital structure, with flexibility to defer dividend distribution, if called upon. Furthermore, the instrument has similar characteristics as debt, including high fixed coupon, step-up of coupon up to 200 basis points (bps; 100 bps equals 1 percentage point), and first-call option after seven years.

 CRISIL has adjusted networth for amortisation of goodwill due to acquisitions

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
* Strong market position post acquisition of NVL
NVCL is a leading cement player in eastern India, with a market share of about 11%. NVCL was operating at about >95% utilisation which would have constrained growth given the favourable demand in the eastern market. Post-acquisition, NVCL`s market position hasimproved with overall capacity of 22-23 MTPA across plants in Chhattisgarh, Jharkhand, Bihar, Odisha, Rajasthan and West Bengal. NVCL shall become one of the major players in the eastern market. Presence of NVL`s split grinding units across eastern states and integrated unit in Chhattisgarh will complement NVCL`s existing plants in the eastern region.

Further, NVCL entered the northern region by commissioning an integrated plant in Rajasthan, split blending unit in Haryana and transfer of 2.28 million tonne Nimbol asset from Nirma to NVCL in fiscal 2020. The existing units, combined with the Nimbol assets shall benefit from synergies, including rationalisation of marketing network and cost savings due to ramp-up in scale of operations.

NVCL has its own captive limestone mines, clinker capacity and is in the process of setting up captive power plants (CPP) and waste heat recovery systems (WHRS). Most of this has been commissioned in fiscal 2020 and the balance are expected to be commissioned in fiscal 2021. The established market position is supported by strong brands (such as Duraguard, Concreto, Infracem) and an extensive network of over 5,000 dealers. Strong brand equity provides the ability to command a premium for products.

Also with this acquisition, NVCL got access to adequate limestone reserves which shall benefit over the medium term. Presence of grinding units in key states shall help in product optimisation as well as increase the market reach over the medium term. NVCL shall also benefit from dual brand positioning with NVL products in category B and NVCL products in category A, wherein NVCL brands command a premium of Rs 20-25 per bag as compared to NVL brands in the trade segment.

In fiscal 2020, Nuvoco has achieved volumes of about 12.2 MTPA impacted on account of subdued demand scenario and lower sales during March 2020 owing to the lockdown. In first quarter of fiscal 2021 company had been able to sell volumes of about 2.9 MTPA (combined NVCL and NVL) supported by pent-up demand. While overall volumes are likely to be impacted in fiscal 2021 owing to economic slowdown caused by pandemic, CRISIL expects demand recovery to be faster in the eastern region and realization to remain healthy which shall support revenues.

* Healthy operating efficiency
Operating efficiency has been strong, with above-average profitability per-tonne, driven by sales of only blended cement, premium commanded by strong brands and use of competitively sourced power, slag and fly ash. In fiscal 2020 profitability has improved owing to lower power, fuel, and freight cost. With the completion of capex programme (CPP and WHRS) the reliance on external power source shall reduce leading to considerable savings in cement production cost fiscal 2021 onwards.

Further NVCL plans to improve operational efficiency (EBITDA per tonne) of NVL plants to around Rs 1000/tonne supported by product premiumisation, logistic and cost synergies. While logistic and procurement synergies are likely to come in early, synergies from product premiumisation is expected to be partially achieved in this fiscal. These synergies along with benefits from cost rationalisation initiatives undertaken by NVCL is expected to result in healthy operating profitability over the medium term.

In first quarter of fiscal 2021, the NVCL and NVL has been able to achieve EBITDA of  around Rs 250 crore supported by pent-up demand, price hikes taken and softening of the raw material prices. While the margins are likely to be impacted by the pandemic; the extent of the impact shall remain a key monitorable.

 * Healthy financial flexibility
NVCL enjoys healthy financial flexibility as part of the Nirma group; is strategically important to the group and hence financial oversight from Nirma group would continue. While financial flexibility exists, NVCL's internal cash accrual and refinancing of debt will remain the primary source of funding for its capex and debt repayment. Moreover, NVCL will continue to evaluate various options of fund raising to meet its funding requirement.

The ratings also factor in deleveraging plans of about Rs 4,000 crore by the end of fiscal 2021 or early fiscal 2022 which shall improve financial flexibility of the Nirma group.

Any change in NVCL's strategic importance to the group or delay in deleveraging plan will be key rating sensitivity factors.

 Weaknesses
* Constrained financial risk profile with higher leverage
With this transaction, NVCL`s leverage has increased to over 4 times over the near term owing to external borrowings to fund the NVL acquisition. The leverage is expected to improve gradually with ramp-up of EBITDA due to operational efficiencies and realisation of deal synergies.

The enterprise value of Rs. 5,265 crore had been funded through debt of around Rs 1,330 crore, equity infusion of around Rs 1,161 crore from NEPL, private equity investment at NVCL of Rs 500 crore, standalone debt of Rs 2,044 crore at NVL and rest through Nuvoco's accruals. The equity infusion of Rs. 1,161 crore from NEPL has been funded through Rs. 400 crore NCDs borrowed at NEPL and rest from Nirma through issuance of preference shares.  The contribution from Nirma was funded through debt of Rs 740 crore. In addition, NVCL has also repaid ICDs from Nirma through additional equity infusion of Rs. 439 crore from NEPL, which in turn has been funded through proceeds from Nirma. The repayment of these loans taken at Nirma and NEPL will be met through the deleveraging plans. In addition to this, NVCL has also refinanced the existing NCDs of Rs 1600 crore with short term debt and about Rs 1450 crore shall be due for refinancing in July 2021.

In the past, financial risk profile had been constrained owing to debt-funded acquisition which resulted in net debt to EBITDA ratio of over 4.8 times as on March 31, 2017. The leverage gradually improved to 2.4 times as on March 31, 2020 supported by strong operations and improvement in realisations. With this transaction, while leverage has increased to above 4 times, it is expected to gradually correct to about 2.0 times by the end of fiscal 2022.

NVCL has moderate capex plans of about Rs 12 billion in the next two fiscals ending fiscal 2022 in NVCL and NVL plants to be funded through internal accruals. The capex plans are towards capacity expansion and debottlenecking which shall result in enhanced capacity and higher clinker availability and benefit NVCL over longer duration. Improved profitability of merged assets, through operational synergies and superior brand positioning, should benefit the company. Also, consolidated cash accrual is likely to increase over the medium term, backed by cost initiatives (including the setting up of CPP, WHRS, and debottlenecking of existing capacities) undertaken by the company and realisation of synergies. Utilisation of it to reduce debt should strengthen the debt protection metrics.

* Susceptibility to variations in input costs and cyclicality in the cement industry
NVCL's cement facilities are primarily in Eastern India, which has seen relatively low price volatility and healthy demand in the past. However, realisations and profitability are constrained by demand, supply, sales and other regional factors. Moreover, susceptibility to fluctuations in the price of inputs, including raw material, power, fuel, and freight, persists. In addition, the margin will remain sensitive to the cyclical nature of the cement industry.
Liquidity Strong

Liquidity is strong, backed by the financial flexibility derived from being a part of the Nirma group, and the ability to raise short- and long-term debt at short notice and at competitive rates. NVCL and NVL has combined sanctioned limits of over Rs 750 crore against which unutilized lines shall be about Rs 300-350 crore backed by adequate drawing power. Cash and equivalents of about Rs 300 crore also supports liquidity. The company is likely to generate ebitda of about Rs 4,000 crore over next two fiscals through fiscal 2022 as against repayment obligations of Rs 800 crore over the same period. NVCL has moderate refinancing risk with debt maturity of about Rs 1,850 crore in fiscal 2022 which the company plans to refinance over longer tenure.

Outlook: Negative

The negative outlook signifies the possibility of weakening of financial risk profile of NVCL on account of the increase in the leverage levels to fund the acquisition.

Rating sensitivity factors
Upward factors
* Sustained improvement in accruals supported by improvement in operational efficiency and realisation of synergies
* Reduction in debt levels resulting in net debt to EBITDA below 1.5 times on a sustained basis.

 Downward factors
* Delay in improvement in net debt to EBITDA ratio to around 2 times by March 31, 2022, primarily because of:
- Delay in realisation of synergies from the acquisition
- Lower-than-expected ramp-up in cash accrual, because of inability to fully pass on cost increases to customers, or delay in receipt of benefits from CPP and WHRS implementation
- Significant debt-funded growth plans
* Delay in equity issuance at NVCL resulting in delay in deleveraging plans of the group.

About the Company

NVCL manufactures cement, and has an installed capacity of 14.05 MTPA (including Nimbol assets 2.28 MTPA) and operates around 67 RMX plants across India.  It has four integrated cement plants, two grinding units, one blending unit, and ready-mix concrete business. Operations are in West Bengal, Bihar, Jharkhand, Chhattisgarh, Delhi, Haryana, Rajasthan, Gujarat, UP, MP, Delhi and Odisha. The main brands are Concreto, Duraguard, and Infracem.

NVCL was a wholly owned subsidiary of Nirma. In fiscal 2020, Nirma transferred its 100% holding to NEPL (promoter company). Subsequently the cement undertaking in Nirma (2.28 MTPA Nimbol plant) was merged with NVCL post receipt of National Company Law Tribunal approval in January 2020.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 6787 6513
Reported profit after tax (PAT) Rs crore 249 126
PAT margin % 3.7 1.9
Adjusted debt/adjusted networth Times ~1 1.0
Interest coverage Times 3.2 2.31
*CRISIL adjusted numbers 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Complexity Rating assigned with outlook
NA Commercial paper NA NA 7-365 days 500 Simple CRISIL A1+
NA Cash credit & working capital demand loan^@# NA NA NA 505 NA CRISIL AA/Negative
NA Working capital demand loan## NA NA NA 125 NA CRISIL AA/Negative
NA Letter of credit & bank guarantee* NA NA NA 120 NA CRISIL A1+
NA Term  Loan Sep 2019 NA Sep-2023 150 NA CRISIL AA/Negative
NA Term  Loan Sept 2019 NA Sep-2024 150 NA CRISIL AA/Negative
NA Term  Loan Sept 2019 NA Jun-2025 150 NA CRISIL AA/Negative
NA Term  Loan Sep 2018 NA Sep-2025 375 NA CRISIL AA/Negative
NA Term  Loan Dec 2018 NA Dec-2025 375 NA CRISIL AA/Negative
NA Term loan Jul 2020 NA Jul 2030 1000 NA CRISIL AA/Negative
INE118D07120 Debentures 30-Aug-2019 9.15% 30-Aug-2022 350 Simple CRISIL AA/Negative
INE118D08052 Perpetual non-convertible debentures 6-Jul-17 9.65 6-Jul-77 300 Highly Complex CRISIL AA-/Negative
INE118D08045 Perpetual non-convertible debentures 6-Jul-17 10.15 6-Jul-77 300 Highly Complex CRISIL AA-/Negative
INE118D07138 Non-convertible Debentures 11-Jun-20 8.5 9-Jul-21 800 Simple CRISIL AA/Negative
INE118D07146 Non-convertible Debentures 18-Jun-20 8.5 9-Jul-21 650 Complex CRISIL AA/Negative
INE118D07153 Non-convertible Debentures 1-Jul-20 8.75 15-Sep-21 215 Simple CRISIL AA/Negative
INE118D07161 Non-convertible Debentures 1-Jul-20 8.75 25-Mar-22 185 Simple CRISIL AA/Negative
NA Non-convertible Debentures% NA NA NA 1150 NA CRISIL AA/Negative
^Interchangeable with bank guarantee/letter of credit
*Full interchangeable with bank guarantee and letter of credit
$Interchangeble towards Bank Guarantee upto Rs. 30 crore
#Interchangeable towards Letter of Credit upto Rs.50 crore
@Limits interchangeable with bank guarantee / letter of credits up to Rs 50 crore
##Interchangeable with bank guarantee
%Yet to be issued
 
Annexure - List of Entities Consolidated
Name of the Company Type of Consolidation Rationale
Nu Vista Ltd Full consolidation Subsidiary
 
Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Complexity level Issue size (Rs.Crore)
INE548V07039 Debentures 14-Sep-2016 8.57% 14-Sep-2020 Simple 800
INE548V07047 Debentures 14-Sep-2016 8.66% 14-Sep-2021 Simple 800
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+  01-04-20  CRISIL A1+  09-12-19  CRISIL A1+  31-12-18  CRISIL A1+    --  -- 
        19-03-20  CRISIL A1+  26-08-19  CRISIL A1+           
        17-02-20  CRISIL A1+/Watch Developing  20-08-19  CRISIL A1+           
            05-03-19  CRISIL A1+           
            22-02-19  CRISIL A1+           
Non Convertible Debentures  LT  2200.00
31-07-20  		CRISIL AA/Negative  01-04-20  CRISIL AA/Watch Developing  09-12-19  CRISIL AA/Stable  31-12-18  CRISIL AA/Stable  14-09-17  CRISIL AA/Negative  -- 
        19-03-20  CRISIL AA/Watch Developing  26-08-19  CRISIL AA/Stable  29-11-18  CRISIL AA/Stable  22-05-17  CRISIL AA/Negative   
        17-02-20  CRISIL AA/Watch Developing  20-08-19  CRISIL AA/Stable  29-09-18  CRISIL AA/Stable  10-05-17  CRISIL AA/Negative   
            05-03-19  CRISIL AA/Stable           
            22-02-19  CRISIL AA/Stable           
Perpetual Non Convertible Debentures  LT  600.00
31-07-20  		CRISIL AA-/Negative  01-04-20  CRISIL AA-/Watch Developing    --    --    --  -- 
        19-03-20  CRISIL AA-/Watch Developing               
Fund-based Bank Facilities  LT/ST  2830.00  CRISIL AA/Negative  01-04-20  CRISIL AA/Watch Developing  09-12-19  CRISIL AA/Stable  31-12-18  CRISIL AA/Stable/ CRISIL A1+  14-09-17  CRISIL AA/Negative/ CRISIL A1+  CRISIL AA/Negative/ CRISIL A1+ 
        19-03-20  CRISIL AA/Watch Developing  26-08-19  CRISIL AA/Stable/ CRISIL A1+  29-11-18  CRISIL AA/Stable/ CRISIL A1+  22-05-17  CRISIL AA/Negative/ CRISIL A1+   
        17-02-20  CRISIL AA/Watch Developing  20-08-19  CRISIL AA/Stable/ CRISIL A1+  29-09-18  CRISIL AA/Stable/ CRISIL A1+  10-05-17  CRISIL AA/Negative/ CRISIL A1+   
            05-03-19  CRISIL AA/Stable/ CRISIL A1+           
            22-02-19  CRISIL AA/Stable/ CRISIL A1+           
Non Fund-based Bank Facilities  LT/ST  120.00  CRISIL A1+  01-04-20  CRISIL A1+  09-12-19  CRISIL A1+  31-12-18  CRISIL A1+  14-09-17  CRISIL A1+  CRISIL A1+ 
        19-03-20  CRISIL A1+  26-08-19  CRISIL A1+  29-11-18  CRISIL A1+  22-05-17  CRISIL A1+   
        17-02-20  CRISIL A1+/Watch Developing  20-08-19  CRISIL A1+  29-09-18  CRISIL A1+  10-05-17  CRISIL A1+   
            05-03-19  CRISIL A1+           
            22-02-19  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit & Working Capital demand loan^@# 505 CRISIL AA/Negative Cash Credit & Working Capital demand loan^@# 505 CRISIL AA/Watch Developing
Letter of credit & Bank Guarantee* 120 CRISIL A1+ Letter of credit & Bank Guarantee* 120 CRISIL A1+
Term Loan 2200 CRISIL AA/Negative Proposed Long Term Bank Loan Facility 1000 CRISIL AA/Watch Developing
Working Capital Demand Loan## 125 CRISIL AA/Negative Term Loan 1200 CRISIL AA/Watch Developing
-- 0 -- Working Capital Demand Loan## 125 CRISIL AA/Watch Developing
Total 2950 -- Total 2950 --
^Interchangeable with bank guarantee/letter of credit
*Full interchangeable with bank guarantee and letter of credit
$Interchangeble towards Bank Guarantee upto Rs. 30 crore
#Interchangeable towards Letter of Credit upto Rs.50 crore
@Limits interchangeable with bank guarantee / letter of credits up to Rs 50 crore
##Interchangeable with Bank guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cement Industry
CRISILs Criteria for rating short term debt

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