Detailed Rationale

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

 

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

 

According to the payment mechanism, if SCL fails to service the debt obligation on the 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 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 rating continues to factor in the strategic importance of SCL to JSWCL, along with backward integration in terms of captive limestone mines. These strengths are partially offset by exposure to project implementation risk, modest scale of operations and weak financial risk profile.

 

SCL commissioned its clinker unit of 4,000 tonne per day (TPD) capacity in January 2023, which is under trial run. Ability to stabilise and ramp up the clinker unit, along with securing requisite consent/approval to operate it to full capacity, will be a monitorable.

Analytical Approach

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

 

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

Key Rating Drivers & Detailed Description

Strengths:

• Creditworthiness of the guarantor i.e. JSWCL: The strong credit risk profile of JSWCL is driven by its strong business risk profile following geographical diversification in revenue and high operating efficiency. Financial risk profile of the guarantor has improved after raising equity from private equity 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 in the support it receives from the JSW group and the financial flexibility it enjoys being part of the group.

 

• Strategic importance of SCL to JSWCL: As on December 31, 2022, JSWCL held 59.32% equity stake in SCL, giving it complete 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 394 crore as on March 31, 2022. The parent continues to maintain its stance of financial and managerial support, given the strategic importance of SCL to JSWCL.

 

Capacity addition undertaken in SCL is strategic from JSWCL’s perspective as the commissioning of the 4,000-TPD clinker plant would meet the clinker requirement of the grinding units of the parent in east India (viz Jajpur in Odisha and Salboni in West Bengal). 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 in Khatkurbahal, Odisha, which has 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 1,525 crore. The capex includes setting up a 4,000-TPD clinkerisation unit, 1.05 million tonne per annum (MTPA) grinding unit, 9 megawatt waste heat recovery plant, 4 MTPA 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 has set up clinker unit which has commenced trial run while grinding unit will be set up. The other projects would be partially taken up along with phase-I. The capex is being funded through term debt of Rs 1,066 crore and infusion from JSWCL in the form of subordinated debt and/or equity along with rights issue by SCL expected around first half of fiscal 2024. 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 has suspended its operations during fiscal 2022 till January 2023 due to ongoing capex. The company continues to report cash losses. With commissioning of the planned capex scale of operations is expected to increase substantially.

 

• Weak financial risk profile: Continued losses have eroded networth and kept debt protection metrics weak. However, 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 the former in the form of an unconditional and irrevocable corporate guarantee extended by the parent. 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 1,066 crore and the rest from JSWCL and planned 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 limit to fund operations.

 

As part of the JSW group, JSWCL enjoys financial flexibility. Its liquidity has improved after raising funds from private equity investors. Its cash and equivalent stood at Rs 555 crore as on March 31, 2022 and are expected to be around Rs 100 crore over the medium term with additional cushion in the form of moderately utilised fund-based working capital limit.

Outlook: Stable

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

 

CRISIL Ratings believes the parent 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 or change in its support philosophy towards SCL
• 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 an explicit credit enhancement feature in compliance with the Securities and Exchange Board of India (SEBI) circular dated June 13, 2019.

Key drivers for unsupported ratings

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

About the Company

SCL, incorporated in 1985, commenced commercial production in 1986. Its manufacturing facility is located in village Telighana, Odisha, and limestone mines are in Khatkurbahal (Kutra, Odisha). SCL was acquired by JSWCL in fiscal 2017 and became its subsidiary thereafter. As on March 31, 2022, SCL has clinker and grinding capacity of 0.2 MTPA. At present, SCL’s clinker capacity has increased to 4000 TPD with the commissioning if clinker unit in January 2023. With the ongoing capex plans, its cement grinding capacity would increase to 1.05 MTPA.

 

About the guarantor

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. JSWCL has cement manufacturing capacity of 16.6 MTPA spread across South (9.0 MTPA), West (2.5 MTPA) and East India (5.1 MTPA). The company 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).

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