Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/CRISIL AA-/Stable/CRISIL A1+' ratings on the bank loan facilities and debt programmes of Nuvoco Vistas Corporation Ltd (NVCL). Further, CRISIL Ratings has withdrawn its rating on perpetual non convertible debentures (NCD) aggregating Rs.300 crore (see 'Annexure - Details of Rating Withdrawn' for details)  upon redemption and on receipt of repayment confirmation from the debenture trustee. The withdrawal is in line with CRISIL Ratings’ rating withdrawal policy.

 

The ratings continue to derive comfort from company’s  strong market position in country’s eastern region and diversification in the northern regions. Cost-optimisation initiatives (including debottlenecking of current capacities and setting up of alternate fuel facilities) in the ongoing business and expected ramp-up of acquired assets along with business synergies (product premiumisation and logistic synergies) shall also support cash flow. NVCL enjoys healthy financial flexibility being a part of the Nirma group. These strengths are partially offset by the moderate financial risk profile and susceptibility to variations in input costs and cyclicality in the cement industry.

 

The ratings also factor in the expectation of continued improvement in the financial risk profile of NVCL on account of sustained deleveraging. The leverage of NVCL had increased following the acquisition of NU Vista Ltd (NVL, formerly known as Emami Cement Ltd) in fiscal 2021. With the initial public offering (IPO) proceeds of Rs 1,500 crore and healthy internal cash accrual, debt levels have come down gradually to Rs 4,030 crore as on March 31, 2024. Net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio also improved to around 2.5 times in fiscal 2024 and is expected to continue to improve despite expectation of debt funded capital expenditure (capex) projects owing to higher operating profitability and scheduled repayment of existing debt.

 

For fiscal 2024, NVCL’s operating income at consolidated level grew modestly by 1.3% to Rs 10,708 crore owing to marginal improvement in realization while volume remained flat. Consequently, ebitda per tonne also improved to Rs 852  in fiscal 2024 partly also supported by reduction in the power and fuel cost. CRISIL Ratings expects demand to continue to grow faster in the eastern region over medium term, thereby boosting revenue. The operating performance is also expected to sustain in fiscal 2025 owing to higher operating leverage and synergy benefits on account of increase in scale of operations.

Analytical Approach

CRISIL Ratings consolidates business and financial risk profile of NVCL with its subsidiary and joint venture.

 

CRISIL Ratings has revised its analytical treatment for the perpetual NCD given the exercise of call option by the company for repayment of part of these NCDs and has now considered remaining outstanding portion of Rs 300 crore as 100% 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.

 

CRISIL Ratings has adjusted networth for amortisation of goodwill on account of 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 following acquisition of NVL: NVCL standalone was operating at very high capacity utilisation. With the acquisition of NVL, it increased its installed capacity (NVCL+ NVL) and has become a leading player in the eastern region. Following the acquisition, the market position of NVCL has improved, with overall capacity of 25 million tonne per annum (MTPA) across plants in Chhattisgarh, Jharkhand, Bihar, Odisha, Rajasthan and West Bengal. Presence of the split grinding units of NVL across eastern states and an integrated unit in Chhattisgarh complements the plants of NVCL in the eastern region.

 

Furthermore, in the northern region NVCL has an integrated plant in Chittorgarh (Rajasthan), a split blending unit in Haryana and an integrated unit in Nimbol (Rajasthan). These units shall benefit from synergies, including rationalisation of the marketing network and cost savings because of ramp-up in scale of operations.

 

NVCL has its own captive limestone mines and clinker capacity and has set up captive power plants and waste heat recovery systems across various plants. The established market position is supported by strong brands, such as Duraguard, Double Bull, Concreto and Infracem, and an extensive network of dealers and sub dealers of NVCL and NVL. Strong brand equity provides the ability to command a premium for products.

 

With the acquisition, NVCL got access to adequate limestone reserves, which shall benefit its business over the medium term. Presence of grinding units in key states will help in product optimisation as well as to increase market reach over the medium term.

 

• Healthy operating efficiency: Operating efficiency has remained healthy (barring the decline in profitability during fiscal 2023 owing to rise in input costs on account of the power and fuel costs), driven by operational synergies with NVL, superior brand positioning, utilisation remaining high at around 75% and increase in captive capabilities for meeting power requirements.

 

However, the company’s Return on Capital Employed (RoCE) has remained subdued in the past largely owing to large acquisitions undertaken in the past resulting in recognition of intangibles. This is expected to gradually improve over the medium term owing to healthy profitability.

 

Weaknesses:

• Moderate financial risk profile: The financial risk profile had been constrained by the debt-funded acquisition of NVL. While leverage increased in fiscal 2021, it has progressively corrected through the IPO proceeds and healthy internal cash accrual.

 

Despite the same, financial risk profile is expected to improve going forward, with net debt to Ebitda expected to reduce supported by better operating performance and scheduled repayment of existing debt. Debt protection metrics are also expected to improve owing to higher profitability.

 

The company is expected to incur capex of Rs 300- 400 crore in fiscal 2025 towards efficiency improvement projects and regular maintenance capex. Further, the company is also evaluating setting up the plant once the net debt reduces to the range of Rs 3,500 - Rs. 4,000 crore.  The capex is likely to be funded via mix of debt and equity/ accruals. However, finer details viz timeline, size of plant, total cost and funding mix are still under evaluation and will remain a monitorable.

 

• Susceptibility to variations in input costs 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

Liquidity is strong, backed by the ability to raise short- and long-term debt at short notice at competitive rates. NVCL (at consolidated level) has a sanctioned limit of about Rs 1,900 crore, which is moderately utilised; cash and equivalents of over Rs 100 crore as on March 31, 2024, also support liquidity. The company is likely to generate cash accruals of Rs ~1,000-1,200 crore per fiscal over 2025 and 2026, which should support timely repayment of debt.

 

ESG profile

The environment, social and governance (ESG) profile of NVCL supports its healthy credit risk profile. The cement sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption. This is because of the energy-intensive cement manufacturing process 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. NVCL has focused on mitigating its environmental and social risks.

 

Key ESG highlights

• NVCL’s carbon emissions intensity fell ~1.1% on-year to 457 kg per ton of cementitious materials in fiscal 2024. Additionally, the emission intensity in concrete decreased by 8.7% on-year to 2.64 kg CO2 per cubic meter in fiscal 2024.
• The company has utilized ~34% alternate materials (like fly ash and slag) as input raw materials and ~13% alternate fuels required to produce cement in fiscal 2024.
• The company increased the solar capacity from 1.5 MWp in fiscal 2023 to 5.3 MWp in fiscal 2024 and set a target to increase the capacity to more than 15 MWp by 2025.
• NVCL’s lost time injury frequency rate stood at 0.74x for employees and 0.16x for workers in fiscal 2024.
• Its governance structure is characterized by 50% of its board comprising independent directors, split in position of managing director (MD) and chairman, dedicated investor grievance redressal system and extensive financial disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of NVCL to ESG will play a key role in enhancing stakeholder confidence, given access to domestic capital markets.

Outlook: Stable

The outlook reflects the strong business risk profile of the company supported by its leading position in the eastern market and expectation of improvement in the financial risk profile.

Rating Sensitivity factors

Upward factors:

• Sustained improvement in cash accrual, 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 2.5 times.
• Significant debt-funded growth plans.

About the Company

NVCL manufactures cement and has installed capacity of 25 MTPA on consolidated basis. It operates 58 ready-mix concrete plants across India.  The company has integrated cement plants, grinding and blending units and a ready-mix concrete business. Operations are spread across West Bengal, Bihar, Jharkhand, Chhattisgarh, Delhi, Haryana, Rajasthan, Gujarat, Uttar Pradesh, Madhya Pradesh, Delhi and Odisha. The main brands are Concreto, Duraguard, Double Bull and Infracem. NEPL and promoters of the Nirma group hold about ~71.8% in NVCL post IPO and NVL is a 100% subsidiary of NVCL.

 

For fiscal 2024, operating income increased by 1.3% to Rs 10,708 crore owing to increase in realisation while volume remained flat. Profit after tax (PAT) for the same period increased to Rs 147 crore.

Key financials (Consolidated)*

Particulars	Unit	2024	2023
Revenue	Rs crore	10708	10574
Reported PAT	Rs crore	147	16
PAT margin	%	1.4	0.1
Adjusted debt/adjusted networth#	Times	0.7	0.7
Adjusted interest coverage	Times	2.8	2.2

*As per CRISIL analytical adjustment

#CRISIL Ratings-adjusted numbers for amortisation of goodwill; hence, networth will not match the reported numbers

Any other information: Not Applicable