Detailed Rationale

CRISIL Ratings has migrated its rating on the long-term bank facilities of Shiva Cement Ltd (SCL) to ‘CRISIL A+/Stable’ from ‘CRISIL A+ (CE)/Stable’.

 

The company is a subsidiary of JSW Cement Ltd (JSWCL; ‘CRISIL A+/Stable’) and has clinker manufacturing capacity of 1.4 MTPA in Odisha along with captive limestone mines. It supplies a large part of its clinker to the grinding units of JSWCL in the east region and thus is crucial to the parent.

 

The migration in ratings underpins the increased strategic and economic importance of SCL to JSWCL, post operationalisation of the former’s clinker capacity and expected commissioning of 1 MTPA grinding unit in fiscal 2026. Further, the ratings continue to factor in the support of JSWCL towards SCL, as reflected in history of equity infusion, additional infusion expected during rights issue in the first quarter of fiscal 2025, loans outstanding to SCL, and extension of unconditional and irrevocable corporate guarantee to term loans of SCL. These strengths are partially offset by exposure to project implementation risk, modest scale of operations and weak financial risk profile.

 

The business risk profile of SCL is marked by adequate market position and operating efficiency post operationalisation and ramp up of 1.4 MTPA clinker unit. As per the management, the company achieved utilisation levels of more than 90% and EBITDA/tonne of more than Rs 800 during Q4FY24. High utilisation rates along with high cement to clinker ratio, reduction of fixed cost, and increase in the use of AFR are expected to help the company generate Ebitda/tonne of more than Rs 850 on cement and clinker sales over the medium term. Further, the business risk profile will be supported by expected commissioning of 1 MTPA grinding unit in the first half of fiscal 2026 and incremental Ebitda from dolomite sales starting fiscal 2025.

 

As stated earlier, continued losses led to networth erosion and kept the debt protection metrics weak. Going forward, the financial risk profile will be supported by accruals from new capacity, and inflow of funds from rights issue (issue size of Rs 400 crore), to be executed by May 2024. However, improvement in the debt protection metrics is expected to be only gradual, with company’s capex plans of around Rs 450 crore planned over fiscal 2025-2027, to be funded by a mix of equity and debt.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has analysed the business and financial risk profiles of SCL. Further, it has applied its parent notch-up framework to factor in the support from JSWCL.

 

Additionally, unsecured loans of Rs 621 crore from the promoter, JSWCL, has been treated as neither debt nor equity as these loans are subordinated to all external borrowings, expected to remain in the business over the medium term and interest is repayable along with the principal at the end of the tenure. The tenure of the loan is also extendable.

Key Rating Drivers & Detailed Description

Strengths:

• Credit profile of the parent, JSWCL: The strong credit risk profile of JSWCL is driven by its strong business risk profile following geographic diversification in revenue and high operating efficiency. The financial risk profile of the parent improved after raising equity from private equity investors and is expected to be supported by higher accruals from new capacity, while the business risk profile continues to strengthen with commissioning of new capacity and ongoing capacity addition. The credit risk profile of JSWCL also factors in the support it receives from the JSW group and the financial flexibility it enjoys from being part of the group.

 

• Strategic importance of SCL to JSWCL and continued strong support from the parent: As on December 31, 2023, JSWCL held 59.59% equity stake in SCL, giving it sizeable control over the latter’s operations. JSWCL has also extended support to SCL by infusing funds into the company to support its liquidity as and when required. For instance, in fiscal 2021, JSWCL infused Rs 100 crore by subscribing 1% optionally convertible cumulative redeemable preference shares of SCL. It has also supported the company in the past through significant advances and intercorporate deposits. Outstanding loans from JSWCL to SCL stood at around Rs 621 crore as on March 31, 2023. The parent continues to maintain its stance of financial and managerial support, given the strategic importance of SCL to JSWCL.

 

The clinker unit in SCL is strategic from JSWCL’s perspective as the 1.4 MTPA clinker plant will meet the clinker requirement of the grinding units of the parent in east India (viz Jajpur in Odisha and Salboni in West Bengal). Thus, there are strong operational linkages apart from financial support extended by JSWCL.

 

• Backward integration in terms of captive limestone mines: SCL has captive limestone (key raw material) mines in Khatkurbahal, Odisha, which have mining life of more than 40 years and adequate reserves to meet existing as well as post-expansion requirements. The reserve in the eastern region is important as cement players there mostly procure clinker from Chhattisgarh or south India. The location of the mines is also strategic (about 12 km from the plant) and helps reduce freight cost.

 

Weaknesses:

• Exposure to project implementation risk: SCL is undertaking a capital expenditure (capex) of around Rs 450 crore over fiscal 2025 to 2027. The capex includes setting up a 1.05 MTPA grinding unit, railway siding inside clinker plant, around 12 km railway track for transportation of finished goods and around 7 km overland belt conveyor to transport limestone from mines to the plant. The cement unit is expected to be commissioned in the first half of fiscal 2026. This exposes the company to project risk given its small scale of operations and will be monitorable.

 

• Modest scale of operations and continued losses: SCL suspended its operations from fiscal 2022 to June 2023 owing to ongoing capex. The company continues to report profit after tax (PAT) losses. Utilisation levels were low during quarter two and three of fiscal 2024 owing to weak demand in the eastern region. Hence, the company remains susceptible to risks arising from low scale of operations in a geography.

 

• Weak financial risk profile: Debt protection metrics remain weak owing to continued losses leading to erosion of networth. However, with enhancement in operating performance post operationalisation of clinker capacity, the debt protection metrics are expected to gradually improve over the medium term.

Liquidity: Strong

The liquidity of SCL derives strength from the overall liquidity of JSWCL owing to the support extended by JSWCL to SCL. Further, with presence of corporate guarantee on Rs 850 crore of term loan towards the capex, JSWCL is likely to provide financial support in the event of exigency in a timely manner.

 

As part of the JSW group, JSWCL enjoys financial flexibility. Cash and equivalent stood at around Rs 250 crore as on December 31, 2023, along with moderately utilised fund-based working capital limit. The parent is expected to maintain cash and equivalent over Rs 50 crore over the medium term. Net cash accrual is expected at more than Rs 650 crore in fiscal 2024 against debt obligation of around Rs 608 crore.

Outlook: Stable

The outlook on the long-term bank facilities of SCL reflects CRISIL Ratings’ view of ‘Stable’ outlook on the credit risk profile of JSWCL.

 

CRISIL Ratings believes JSWCL will continue to benefit from healthy operating efficiency, increasing geographic presence with operationalisation of new capacities and overall healthy demand outlook for the cement sector.

Rating Sensitivity factors

Upward factor

• Improvement in the overall credit risk profile of the parent by 1 notch or more

 

Downward factors

• Downward revision in JSWCL’s long-term rating by 1 or more notch and/or change in shareholding/support philosophy toward SCL
• Significant deterioration in SCL’s operating performance
• Significant time and cost overruns in the project completion.

About the Company

SCL was incorporated in 1985 and the first commercial production commenced in 1986. The manufacturing facility is in village Telangana (Kutra), District Sundargarh (Odisha) and limestone mines are in Khaturbahal (Odisha). The company was acquired by JSWCL in fiscal 2017 and became its subsidiary thereon. Its natural marketing territory is Odisha, West Bengal, Jharkhand and Bihar. SCL brands its cement Mahabal, which consists of both Portland Slag Cement (PSC) and Portland Pozzolana Cement (PPC). As on December 31, 2023, SCL has clinker capacity of 1.3 MTPA (4,000 tpd) and waste heat recovery (WHR) plant of 9 MW, while it will be undertaking capacity addition to add grinding capacity of 1 MTPA in fiscal 2026.

About the parent

JSWCL, part of the JSW group, was incorporated in 2006, with its first unit of 0.6 MTPA grinding capacity at Vijayanagar commissioned in fiscal 2009. Presently JSWCL has cement manufacturing capacity of 20.6 MTPA spread across south (11.0 MTPA), west (4.5 MTPA) and east (5.1 MTPA) India. It manufactures various grades of cements such as PSC (Portland Slag Cement), OPC (ordinary portland cement), CHD (Concreel HD), GGBS (ground granulated blast furnace slag) and CPC (composite cement).

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Term loan	Nov-2023	8.73%**	Sep-2033	850	NA	CRISIL A+/Stable
NA	Cash Credit & Working Capital Demand Loan*	NA	NA	NA	75	NA	CRISIL A+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	141	NA	CRISIL A+/Stable

*Fungible between fund-based and non-fund-based facility up to Rs 50 crore

**Floating at three-month MCLR+0.33%