Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL A+(CE)/Stable’ rating to the Rs 1066 crore long-term bank loan facility of Shiva Cement Limited (SCL).

 

The rating centrally factors in the unconditional and irrevocable corporate guarantee extended by the company’s parent, JSW Cement Limited (JSWCL, rated ‘CRISIL A+/Stable/CRISIL A1’) and the payment mechanism administered by the security trustee.

 

According to the proposed payment mechanism, if SCL fails to service the debt obligation on due date, then JSWCL (guarantor) will make the requisite payment either within three business days from the date of receipt of demand notice from the trustee or within three business days from the scheduled due date, whichever is earlier. The proposed guarantee covers the principal, interest as well as any other amount payable under the guaranteed bank loan. Thus, the payment structure is designed in a manner that ensures full payment to the lenders in a time bound manner.

 

The guarantee will remain unaffected even if SCL faces bankruptcy; in case of dissolution, insolvency or liquidation; or on winding up proceedings initiated by or against the issuer.

 

The provisional rating will be converted to ‘final’ rating once CRISIL Ratings receives following documents duly executed:

• Guarantee document
• Security Trustee Agreement (If applicable)

 

The rating factors strategic importance of SCL to JSWCL along with backward integration in terms of captive limestone mines. These strength are partially offset by project implementation risk, modest scale of operation and weak financial risk profile.

Analytical Approach

To arrive at the overall rating, CRISIL Ratings has applied its criteria for rating instruments backed by guarantees. The (CE) suffix in the rating reflects the payment structure that is designed to ensure full and time-bound payment to lenders owing to presence of credit enhancement mechanism.

 

To arrive at the unsupported ratings, CRISIL Ratings has applied its criteria for notch-up of ratings based on parent support.

Key Rating Drivers & Detailed Description

Strengths

• Creditworthiness of the guarantor i.e. JSWCL

JSWCL has a strong credit profile, driven by strong business risk profile backed by geographical diversification in revenue and healthy operating efficiency. JSWCL financial risk profile has improved post raising equity from private equity (PE) investors, while business risk profile is expected to strengthen further once the planned capacity addition completes over the medium term.

 

The credit risk profile of JSWCL also factors support received from JSW group and the financial flexibility it enjoys being part of the group.

 

• SCL’s strategic importance to JSWCL

As on June 30, 2021, JSWCL holds 59.32% equity stake in SCL, thus giving it complete control over the operations. JSWCL has extended support to SCL by infusing funds to support its liquidity as and when required. In fiscal 2021, JSWCL infused Rs 100 crore by subscribing 1% optionally convertible cumulative redeemable preference shares (OCCRPS) of SCL. JSWCL has also supported SCL through significant advances and intercorporate deposits in the past. JSWCL’s outstanding loans to SCL stood at around Rs 142 crore as on March 31, 2021. The parent maintain its stance of financial and managerial support to the company, given its strategic importance to JSWCL.

 

The capacity addition undertaken in SCL is strategic from JSWCL’s perspective as the commissioning of 1.32 million tonne per annum (mtpa) clinker plant (commercial operations date – COD - expected by September 2023) would meet the clinker requirement of JSWCL’s grinding units in east India. Currently, the clinker requirement is being imported or procured locally. Thus, there are strong operational linkages expected apart from financial support extended by JSWCL.

 

• Backward integration in terms of captive limestone mines

SCL has captive limestone (key raw material) mines at Khatkurbahal (Odisha) that has mining life for more than 40 years and adequate reserve to meet the existing as well as post expansion requirements. The reserve in eastern region is important as cement players in these region mostly import clinker from Chhattisgarh or south India. The location of mines is also strategic with around 12 km from the plant thus benefits in terms of freight cost.

 

Weaknesses

• Project implementation risk:

SCL is undertaking a capital expenditure (capex) of around Rs 1,525 crore spread over 3-5 years. The capex includes setting up a 1.32 mtpa clinkerisation unit, 1.05 mtpa grinding unit, 9 megawatt waste heat recovery plant, 4 mt crushing plants at dolomite and limestone mines, railway siding inside plant and around 12 kilometre (km) railway track for transportation of finished goods, and around 7 km overland belt conveyor to transport limestone from mines to plant. Under phase-I, SCL plans to set up clinker and grinding unit with expected commercial operations by September 2023, while the other projects would be partially taken up along with phase-I and completed over 4-5 years. The capex is being funded through term debt of Rs 1066 crore and balance through infusion from JSWCL and rights issue by SCL. Once commissioned, the clinker unit is expected to meet JSWCL’s clinker requirement for the eastern region, which is currently met through imports or local procurement. Timely commencement of commercial operations, within budgeted costs, will remain key monitorable.

 

• Modest scale of operations and continued losses: SCL’s topline has remained modest at around Rs 30 crore over the past three years. The company continues to report cash losses. Post commissioning of the clinker and grinding unit, scale of operations is expected to increase substantially.

 

• Weak financial risk profile: Continued losses have eroded the SCL’s networth, and kept debt protection metrics weak. With enhancement in operating performance and infusion of funds from JSWCL, debt protection metrics are expected to improve over the medium term.

Liquidity: Strong

The liquidity of SCL derives strength from the overall liquidity of JSWCL, owing to the credit enhancement available to SCL in the form of an unconditional and irrevocable corporate guarantee extended by JSWCL. JSWCL is likely to provide financial support in the event of an exigency in a timely manner. The capex is funded through debt of Rs 1066 crore and rest from JSWCL and rights issue. Debt is prudently structured with moratorium extending up to 1 year post COD and to be repaid over 9 years in 36 quarterly ballooning instalments. With the commercialisation of its plants, SCL is also expected to avail working capital limits to fund operations.

 

As part of the JSW group, JSWCL enjoys financial flexibility. Its liquidity has improved post raising funds from private equity investors. JSWCL is likely to maintain unencumbered cash and equivalent of Rs 200-250 crore on a steady basis going forward.

Outlook: Stable

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

 

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

Rating Sensitivity factors

Upward Factors

• Improvement in the overall credit risk profile of the guarantor by one notch or more
• Substantial ramp-up in scale and profitability after commercialisation of plants

 

Downward Factors

• Deterioration in the guarantor's overall credit profile by one notch or more
• Non-adherence to the terms of the transaction structure or payment mechanism
• Time or cost overruns in completion of the project

Adequacy of credit enhancement structure

The rating is based upon the strength of an unconditional, continuing and irrevocable guarantee extended by JSWCL. The proposed guarantee covers the principal, interest as well as any other amount payable under the guaranteed bank loan. Thus, the payment structure is designed in a manner that ensures full payment to the lenders in a time bound manner.

Unsupported ratings: CRISIL A

CRISIL Ratings has introduced the 'CE' suffix for instruments having explicit credit enhancement feature in compliance with the Securities and Exchange Board of India’s (SEBI's) circular dated June 13, 2019

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has applied its parent notch-up framework for support available from JSWCL to SCL.

 

Additional disclosures for Provisional ratings:

The provisional rating is contingent upon the execution of the following documents:

• Guarantee document
• Security Trustee Agreement (if applicable)

 

The provisional rating shall be converted into a final rating after receipt of transaction documents duly executed within 90 days from the date of issuance of the instrument.

 

The final rating assigned post conversion shall be consistent with the available documents, as applicable. In case of non-receipt of the duly executed transaction documents within the above-mentioned timelines, the rating committee of CRISIL Ratings may grant an extension of up to another 90 days in-line with its policy on provisional Ratings.

 

Rating that would have been assigned in absence of the pending steps/ documentation:

In the absence of pending documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would have assigned a rating of ‘CRISIL A‘.

 

Risks associated with provisional nature of credit rating:

A prefix of 'Provisional' to the rating symbol indicates that the rating is contingent upon occurrence of certain steps or execution of certain documents by the issuer, as applicable. In case the documents received deviates significantly from the expectations, CRISIL Ratings may take an appropriate action including placing the rating on watch or a rating/outlook change, depending on status of progress on a case-to-case basis. In the absence of the pending documentation, the rating on the instrument would have been different.

About the Company

SCL, incorporated in 1985, commenced commercial production in 1986. The manufacturing facility is located at village Telighana (Kutra), District Sundargarh (Odisha) and limestone mines at Khaturbahal (Kutra, Odisha). SCL was acquired by JSWCL during fiscal 2017 and became its subsidiary thereafter. As on March 31, 2021, SCL has clinker and grinding capacity of 0.2 mtpa, while SCL is undertaking capacity addition, which would increase its clinker and grinding capacity by 1.32 mtpa and 1.05 mtpa, respectively.

About the Guarantor

JSWCL, part of JSW group was incorporated in 2006, with its' first unit of 0.6 mtpa grinding capacity at Vijayanagar commissioned in fiscal 2009. As on March 31, 2021, JSWCL has cement manufacturing capacity of 14 mtpa  spread across south (8 mtpa), west (2.2 mtpa) and east India (3.8 mtpa) and clinker capacity of 3.4 mtpa  including 1 mtpa  in Fujairah (UAE). JSWCL 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).

Key Financial Indicators – SCL - CRISIL Ratings Adjusted numbers

As on/for the period ended March 31		2021*	2020
Revenue	Rs.Crore	28	32
Profit After Tax (PAT)	Rs.Crore	-32	-22
PAT Margin	%	-77.1	-70.5
Adjusted debt/adjusted networth	Times	-9.43	-46.81
Interest coverage	Times	-0.45	-0.57

*based on abridged published financials

 

Key financial indicators – JSWCL Consolidated - CRISIL Ratings Adjusted numbers

As on/for the period ended March 31		2021*	2020
Revenue	Rs.Crore	3,878	2,930
Profit After Tax (PAT)	Rs.Crore	250	154
PAT Margin	%	6.4	5.3
Adjusted debt/adjusted networth	Times	2.05	2.29
Interest coverage	Times	3.02	2.38

*Provisional

List of covenants

• Debt service coverage ratio (DSCR) not below 1.15 times during the currency of the loan
• TTL/TNW not to exceed 3 times
• Fixed Asset Coverage Ratio (FACR) not below 1.15 times
• Net debt / Earnings before interest, tax, depreciation and amortisation not to exceed 5 times in fiscals 2025 and 2026 and then 4.5 times from fiscal 2027 onwards
• The funds infused / to be infused by JSWCL (promoter) / entity controlled by Mr. Sajjan Jindal or the wife, son, daughter and daughter-in-law of Mr Sajjan Jindal (sponsor) or any of their group companies in the form of loan / debt / CCDs / preference shares would be subordinate and subservient to the lenders and shall be subject to restricted payments conditions
• JSWCL to hold at least 51% of the shares in SCL at all times during the currency of the loan
• Sponsor and sponsor group shall maintain shareholding of 51% in JSWCL at all times during the currency of the loan

Any other information: Not applicable