Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of Ramco Industries Ltd (RIL).

 

Revenue increased by a modest 3% in fiscal 2024 driven by growth of 2.7% in the domestic building products business (~87% of revenue), strong growth of ~37% in the revenue of the subsidiary driven by recovery in economic activity in Sri Lanka, compared with previous year. This helped offset revenue decline of 22% on-year in the textile segment, following unfavourable cotton yarn realisation and low demand from end-user segments. Operating profitability remained stable at 10.9% in fiscal 2024, compared with 11.1% in fiscal 2023, due to steady asbestos fibre cost and healthy performance of the Sri Lankan subsidiary, notwithstanding operating loss in the textile segment.

 

The revenue improved by 11% to Rs 896 crore in the first half of fiscal 2025 from Rs 803 crore in the second half of fiscal 2024. The growth was driven by 4% increase in the building products segment with major contribution from its subsidiary and steep increase in sales of the textile segment to satisfy commitments under advance license scheme for import of raw materials. Operating margin improved to ~11% in the first half of fiscal 2025 from 10.32% in the first half of fiscal 2024 because of better realisation from the boards segment and increased revenue share in overall revenue besides recovery in the cotton-yarn spread.

 

Demand for asbestos will likely remain steady with increase in rural income over the near-to-medium term and increased government push towards rural housing. The board business is likely to fare well due to healthy demand, while the textile business segment will benefit from better export. These factors are expected to contribute to revenue growth of 10-12% over the medium term. The operating margin is expected to remain stable at 10-11% mainly due to intense competition from substitute products and pricing competition from peers, which will likely be partially offset by stable asbestos fibre cost.

 

RIL has planned to invest Rs 200 crore in fiscal 2026 to set up a board plant in Madhya Pradesh and is expected to avail debt of Rs 150 crore for the project, which was delayed due to requisite approvals and uncertain market conditions. However, with improving demand for board, the company will likely complete the planned capital expenditure (capex) by fiscal 2026, while revenue generation will commence from fiscal 2027. The project will increase board capacity by 40-50%. Nevertheless, the financial risk profile will likely remain healthy post factoring additional project debt of Rs 150 crore due to existing low debt on its balance sheet. Working capital requirement for RIL increased in fiscal 2023 with larger inventory of asbestos fibre due to uncertainties in supply. The working capital requirement remained at a similar level in fiscal 2024 and is expected to be sustained over the medium term. Total debt was Rs 130 crore as on September 30, 2024, compared with Rs 242 crore as on March 31, 2024. Debt is expected to be Rs 400-420 crore as on March 31, 2025, as RIL has planned to avail debt of Rs 160 crore to fund the acquisition of shares in The Ramco Cements Ltd (RCL; ‘CRISIL A1+’). However, this debt may be retired next fiscal by way of sale of non-core assets or investments by RIL. In the interim, debt protection metrics will be healthy despite higher debt. Adjusted debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio and gearing are expected ~2.5 times and ~0.3 time, respectively, in fiscals 2025 and 2026, compared with 1.47 times and ~0.2 time, respectively, as on March 31, 2024.

 

The rating continues to reflect the established position of the company in the domestic asbestos cement (AC) sheet (ACS) roofing market, its strong presence in the Sri Lankan market and a healthy revenue diversity through presence in textiles, calcium silicate board and wind power. The rating also considers the company’s healthy operating efficiency and strong financial risk profile, driven by steady cash accrual, prudent working capital management and moderate expansion plans. The significant value of investments in the listed Ramco group companies, including RCL, supports RIL’s financial flexibility. These strengths are partially offset by high dependence of the AC roofing business on rural spending, availability and pricing of key raw material (asbestos fibre), exposure to intense competition from peers as well as from substitute steel products. The company is also exposed to regulatory risks on the manufacture and use of asbestos as well as change in policies of key asbestos-producing nations, given that India imports its entire asbestos requirement.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of RIL and its subsidiaries, held directly or indirectly, as all the entities have common management, are in similar businesses, and have significant operational and financial linkages. CRISIL Ratings considers these entities as being strategic to RIL in view of their strong integration with the company’s operations.

 

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 market: RIL has been in the domestic AC roofing business for more than 50 years and is one of the four large players, which collectively account for about 75% of the market share. Pan-India presence and manufacturing facilities across four regions have helped entrench the brand Ramco and shield operations from regional demand-supply mismatch. The company has expanded its market channels and distributor base for better market reach, especially in west India. It continues to leverage its brand for AC roofing products in Sri Lanka, where it is a leading player.

 

• Healthy revenue diversity and adequate operating efficiency: The domestic AC roofing and cement board business continues to be the mainstay, contributing 65-70% revenue in the first half of fiscal 2025. The company also manufactures cotton yarn, which contributed 16% during the same period, while the Sri Lankan roofing business contributed 15%. AC roofing and boards make up the building products division. The boards segment, which has higher margin, contributed ~25% of revenue of the building products division in fiscal 2024, compared with 10% in fiscal 2016. Since 2017, the company has started implementing turnkey projects for roofing solutions in India and Sri Lanka, which will provide opportunities in the future. Price competitiveness, higher diversity in revenue and improvement in the Sri Lankan unit have helped mitigate low demand in the domestic industry. Improving revenue and segmental diversity will likely mitigate the significant fluctuation in the company’s performance over the medium term.

 

• Moderate financial risk profile: The financial risk profile is supported by healthy networth and improved debt protection metrics. Gearing improved to 0.18 time as on March 31, 2024, from 0.26 time as on March 31, 2023. Adjusted debt to Ebitda ratio stood at 1.47 times in fiscal 2024 (1.94 times in fiscal 2023). Net cash accrual to total debt and interest coverage ratios were also healthy at 0.42 time and 6.91 times, respectively, in fiscal 2024, compared with 0.65 time and 26.99 times, respectively, in fiscal 2022. Total outside liabilities to tangible networth (TOLTNW) ratio was less than 0.5 time as on March 31, 2024. The company is expected to avail debt of ~Rs 150 crore for its capex of ~Rs 200 crore in fiscal 2026; nonetheless, the debt metrics will remain healthy on account of steady cash generation and prudent debt amid strong networth. RIL has not extended any guarantees to group entities as of March 31, 2024; earlier there were moderate level of guarantees provided to an associate company, which was retired subsequently. Nevertheless, the extent of support from RIL to other Ramco group companies will remain monitorable.

 

Cash accrual was healthy at Rs 120-140 crore from operations despite operating profitability remaining flat at 10-11% over the near-to-medium term.

 

• Financial flexibility is supported by investments in Ramco group companies and being a leading company of the group: RIL is the second-largest company in the Ramco group after RCL. The company has strong relationships with lenders, allowing it to raise low-cost debt. Its large portfolio of investments in listed group entities, which is completely unpledged, was about Rs 5,150 crore (market value) as on November 22, 2024, and is expected to increase upon further investment in RCL of Rs 160 crore, as announced by RIL on November 11, 2024. While RIL is planning to fund this share purchase by way of debt temporarily, the debt will likely be repaid within a year from cash accrual and sale of non-core assets or from other investments. Also, though the investments in other Ramco group entities are strategic, they lend good financial flexibility and support liquidity to offset any financial exigencies. A moderate portion of the investments was divested during fiscals 2015 and 2016 to support cash flow and reduce debt.

 

Weaknesses:

• Exposure to threat of ban on manufacture or use of asbestos in end-user markets and key asbestos-producing nations: Around 75% of revenue from the building products segment in the domestic market comes from the sale of AC roofing, the company is exposed to the risk of ban on mining and use of asbestos in Russia and Kazakhstan (which are the largest exporters). Brazil and Canada, which were among the world's largest producers, banned the mining and sale of asbestos in 2017 and 2019, respectively but the company continues to procure raw material from Brazil for last 4-5 years. In India, only white asbestos (known as chrysotile) fibre is used as blue and brown asbestos have been banned. Furthermore, all forms of asbestos mining is banned in the country. Geopolitical tensions, such as the Russia-Ukraine war and Red Sea crisis, resulted in increase of landed cost of asbestos fibre due to high logistics cost and rupee depreciation. One of the major suppliers in Brazil has been facing litigation issues however there has been no disruption in supply of material till date. Movement in asbestos fibre prices as well as regulatory changes concerning asbestos mining and usage will remain monitorables.

 

• Dependence on rural spending, and exposure to intense competition: Demand for AC roofing is derived from rural spending on household construction as well as investment in industrial construction, thus exposing the company to rural purchasing power and economic cycles. It also faces competition from peers given its modest growth and presence of 19 players in the industry. Furthermore, AC roofing manufacturers face competition from manufacturers of galvanized iron (GI) roofing sheets, which have emerged as a viable alternative for AC roofing. Sharp decline in the price of GI sheets will impact demand for AC sheets.

 

The prices of raw materials for AC roofing (asbestos fibre and cement) remained largely stable over the past 10-12 months. The operating margin remains vulnerable to any further price volatility or currency fluctuations. While the concentration risk has been mitigated by diversification into boards and steadily increasing presence in Sri Lanka, the AC sheet business in India will continue to remain the mainstay over the medium term.

Liquidity: Strong

Liquidity is supported by healthy cash accrual of Rs 120-140 crore per annum against minimal debt obligation. However, RIL may enhance its board capacity and spend ~Rs 200 crore to set up a board plant and for routine capex which is likely to be funded through debt of Rs.150 crore and remaining through internal accruals or existing surpluses. Accrual from the existing surplus will be adequate for meeting debt obligation. RIL announced the acquisition of RCL shares at market price up to Rs 160 crore, which will be funded by way of debt temporarily. Average utilisation of working capital bank limit of Rs 985 crore was around 42% (out of drawing power) during the 12 months through September 2024. Cash surplus stood at Rs 90.63 crore as on September 30, 2024. Liquidity is also supported by the significant value of investments in listed Ramco group companies.

Rating sensitivity factors

Downward factors

• Prolonged slowdown in demand for AC roofing resulting in considerable decline in revenue
• Sustained decline in operating margin to 7-8% due to increase in input prices or pricing pressure following challenging market conditions
• Moderation in debt metrics due to large, debt-funded capex or acquisitions and with the TOL/TNW ratio more than 1.3 times on a sustained basis
• Decline in the value of investments impacting financial flexibility

About the Company

RIL was incorporated in 1965 by Mr P R Ramasubrahmaneya Rajha, son of Mr P A C Ramasamy Raja, founder of the south India-based Ramco group. RIL manufactures AC roofing sheets in India and Sri Lanka. The company also manufactures calcium silicate board in the building products division and sells cotton yarn of 4-300s counts. It has 10 manufacturing facilities across India for the building products division, one facility in Rajapalayam, Tamil Nadu, for manufacture of cotton yarn, and windmills in Tamil Nadu, Karnataka and Gujarat.

 

For the first half of fiscal 2025, RIL, on consolidated basis, reported profit after tax (PAT) of Rs 49 crore (Rs 40 crore in the corresponding period of fiscal 2024) on net revenue of Rs 896 crore (Rs 803 crore).

About the Group

The Ramco group consists of RCL (‘CRISIL A1+’), Ramco Systems Ltd and RIL. The textile companies in the group include Rajapalayam Mills Ltd (RML; 'CRISIL A+/Negative/CRISIL A1'), Rajapalayam Textile Ltd (RTL; 'CRISIL BBB/Stable'), Ramaraju Surgical Cotton Mills Ltd (RSCM; 'CRISIL BBB/Stable/CRISIL A3+'), Sri Vishnu Shankar Mill Ltd (SVSML; 'CRISIL BBB-/Negative/CRISIL A3') and Sandhya Spinning Mill Ltd (SSML; 'CRISIL BB/Stable/CRISIL A4+').

Any other information: Not Applicable