Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to the commercial paper programme of Prism Johnson Limited (PJL).

 

The rating reflects healthy business risk profile supported by PJL’s position as a prominent cement player in the central region, its established presence in the domestic ceramic and vitrified tiles industry along with one of the leading player in RMC business and improved operating efficiency across divisions. The rating also factors in improving financial risk profile and healthy liquidity maintained. These strengths are partially offset by susceptibility to fluctuations in input costs and realisations, cyclicality in the industry and exposure to intense competition.

 

During the first nine months of fiscal 2022, the consolidated earnings before interest, tax, depreciation and amortisation (EBITDA) margin moderated to 8.7% compared to 10.3% in the corresponding period of the previous fiscal due to subdued performance of the cement division in the third quarter, while the steep decline in operating margin was offset by improved operating performance of the H & R Johnson division (HRJ, tiles business). CRISIL Ratings expects EBITDA margin for fiscal 2022 to be 9-10% compared to 11.4% in the previous fiscal due to continued muted performance of the cement division in the fourth quarter which may be partially offset by improved performance of other divisions. For fiscal 2023, CRISIL Ratings expects the EBITDA margin to improve to 10-11% driven by recovery in the cement division along with sustenance of improved performance of the tiles division.

 

Operating performance has seen significant improvement across divisions, as indicated by the cement division’s EBITDA per tonne in the range of Rs 800-1,000 during fiscals 2019, 2020 and 2021, compared to Rs 500-700 per tonne in fiscals 2017 and 2018. The improvement was driven by various cost optimisation measures carried out along with better realisation. The HRJ division has witnessed a turnaround in the past two years as seen in EBITDA margin improving from 3-4% during fiscals 2018 to 2020 to double digit in fiscal 2021 and fiscal 2022 (barring quarters impacted due to the pandemic). The improvement in profitability was on account of focused sales team generating demand, improving product portfolio and expanding distribution network along with cost rationalisation.

 

Strong operating performance and resultant healthy accrual has consequently improved the financial risk profile as seen in consolidated net debt (gross debt less cash and cash equivalent) to EBITDA ratio improving to 1.8 times as on March 31, 2021, against 3.3 times as on March 31, 2020. CRISIL Ratings expects the net debt to EBITDA ratio to remain below 2 times and would remain a key monitorable. Liquidity remains strong, with cash and cash equivalent of around Rs 450 crore as on December 31, 2021, along with policy to prepay or refinance large part of the term debt a year in advance.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of PJL and its joint ventures (JVs), associate and subsidiary companies as these have strong financial, managerial and operational linkages. CRISIL Ratings has noted PJL’s announcement of divesting the entire stake in insurance business (Raheja QBE), however given uncertainty on the timelines for divestment, pending approval from the regulator, CRISIL Ratings have considered it in consolidated financials.

 

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:

Prominent cement player in the central region, established presence in the domestic tiles business and one of the leading player in RMC business:

PJL is a prominent cement player in the central region with capacity of 5.65 million metric tonne per annum (MTPA) supported by long track record of operations. Cement sales for Prism are concentrated in Uttar Pradesh (UP), Madhya Pradesh (MP) and Bihar with majority of the offtake from eastern UP. PJL sells cement under the brands – ‘Champion’, ‘Champion Plus’ and ‘Duratech’. PJL has also announced greenfield capacity addition of 2 MTPA in eastern UP, expected to be commissioned by fiscal 2025, which would further strengthen its market position in the central region.

 

PJL’s tiles division, HRJ, has total tile manufacturing capacity of 64 million m2 across 11 manufacturing units (including JVs) across India. The division also houses two faucet manufacturing plants at Samba, Jammu & Kashmir, and Baddi, Himachal Pradesh. HRJ has a wide product range including tiles, sanitary ware, faucets, quartz and engineering marbles, and construction chemical. HRJ has wide distribution network of over 1,000 dealers and 18 large format experience centres.              

 

PJL’s is one of the leading ready-mixed concrete (RMC) manufacturer. As on date PJL operates 95 RMC plants in 44 cities/towns across India.

 

Improved operating efficiency across divisions:

The EBITDA per tonne of PJL’s cement division has consistently improved over the last few years as seen in EBITDA per tonne of Rs 800-1,000 during fiscals 2019, 2020 and 2021, compared to Rs 500-700 per tonne in fiscals 2017 and 2018. The improvement was driven by various cost efficiency measures such as savings from installation of waste heat recovery system (WHRS) plant, rationalisation of lead distance, along with increasing share of high margin premium products and industry wide increase in realisations.

 

The HRJ division has witnessed a turnaround in the past two years as seen in EBITDA margin improving from 3-4% during fiscals 2018 to 2020 to double digit in fiscal 2021 and fiscal 2022 (barring quarters impacted due to the pandemic). The improvement in profitability was on account of focused sales team generating demand, improving product portfolio and expanding distribution network along with cost rationalisation.

 

Improving financial risk profile and healthy liquidity:

Strong operating performance and resultant healthy accrual has consequently improved the financial risk profile as seen in consolidated net debt (gross debt less cash and cash equivalent) to EBITDA ratio improving to 1.8 times as on March 31, 2021, against 3.3 times as on March 31, 2020. The debt protection metrics, as indicated by interest coverage and net cash accrual to total debt ratios are estimated to be above 3 times and 0.25 time, respectively, as on March 31, 2022, compared to 2.4 times and 0.1 time, respectively, as on March 31, 2020.  Liquidity remains strong, with cash and cash equivalent of around Rs 450 crore as on December 31, 2021, along with policy to prepay or refinance large part of the term debt a year in advance. Furthermore, proceeds from divestment of stake in the insurance division (around Rs 390 crore; includes Rs 102 crore investment till Feb ‘22, post announcement of deal) is expected to further boost liquidity.

 

Weaknesses:

Susceptibility to fluctuations in input costs and realisations; and cyclicality in the 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 pet coke prices in the second half of fiscal 2022 impacted the profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors.

 

Exposure to intense competition:

The ceramic tiles industry is intensely competitive and dominated by unorganised entities. However, with changes such as closure of ceramic units running on coal gasifiers, and implementation of the Goods and Services Tax (GST) and Real Estate (Regulation and Development) Act, 2016 (RERA), the market share of organised players has expanded in recent times.

 

Despite being a leading player, the HRJ division faces significant competition from reputed brands such as Kajaria Ceramics Ltd, Somany Ceramics Ltd (rated ‘CRISIL AA-/Stable/CRISIL A1+’), Asian Granito India Ltd and Orient Bell Ltd (rated ‘CRISIL A-/Stable/CRISIL A2+’). Intense competition restricts profitability, given the delay in passing on cost hikes to customers.

Liquidity: Strong

Healthy net cash accrual of Rs 350-450 crore per annum for fiscals 2022 and 2023, which is more than adequate to meet the yearly scheduled debt repayment. Also, PJL has demonstrated its ability to refinance debt in the past as the company typically prepays or refinances major portion of loans due in the next one year. Moderately utilised bank lines of Rs 400 crore provide additional cushion to liquidity. Furthermore, being part of a strong group provides healthy financial flexibility.

Rating Sensitivity factors

Downward factors:

• Weakening of the financial risk profile with net debt to EBITDA ratio sustaining above 2.5 times
• Slower-than-expected turnaround in profitability across divisions (cement, HRJ and RMC)
• Large, debt-funded capital expenditure exposing the company to project risks

About the Company

PJL is an integrated building materials company, with wide range of products such as cement, ready-mixed concrete, tiles and bath products. The PJL group currently has four divisions - cement, HRJ, Ready Mix Concrete and RQBE Gen Insurance Co. PJL is listed on BSE & NSE.

 

In the first nine months of fiscal 2022, PJL generated consolidated revenue of Rs 4,452 crore and profit after tax (PAT) of Rs 24 crore, compared to revenue of Rs 3,737 crore and PAT loss of Rs 17 crore in the corresponding period of the previous fiscal.

Any other information: Not applicable