| Shree Cement Limited | ||||||
| 'CRISIL AAA/Stable' assigned to Non Convertible Debentures | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to the Rs.700 crore non-convertible debentures of Shree Cement Ltd (SCL) while reaffirming its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank loan facilities and debt programmes of SCL.
Sales volume increased ~14.7% year-on-year in the domestic market during FY23 as the company ramped up production. However, earnings before interest, tax, depreciation and amortisation (Ebitda) margin contracted to 16.6% from 24.4% due to higher input cost especially power & fuel cost on account of rise in coal/ petcoke prices. The Ebitda margin is expected to improve over the medium term with expected softening in prices of coal/petcoke.
SCL had domestic cement capacity of 46.4 million tonne per annum (MTPA) as on March 31, 2023 and power generation capacity of 888.6 MW as on March 31, 2023. The company is continuously adding capacity across various regions. With the commissioning of 3 MTPA grinding unit in Purulia, West Bengal under the company’s wholly owned subsidiary Shree Cement East Private Ltd (SCEPL), the domestic cement capacity reached 49.9 MTPA as on June 30, 2023. In the northern region, the clinker unit with capacity of 3.8 MTPA and grinding unit with capacity of 3.5 MTPA in Nawalgarh, Rajasthan, is expected to be commissioned by the Q3 of fiscal 2024. The clinker unit of 1.5 MTPA and grinding unit of 3 MTPA in Guntur, Andhra Pradesh is likely to be commissioned by Q2 of fiscal 2025. The company has 385.6 MW of green power generation capacity in India, as on 31 March 2023.
Commencement of operations in these units will take the total capacity in India to around 56 MTPA and accordingly shall further strengthen its market position. Additionally, the company has recently announced capital expenditure (capex) of Rs 7,000 crore to add 12 MTPA of capacity in Rajasthan, Uttar Pradesh and Karnataka which is expected to take the total domestic capacity to around 68 MTPA by fiscal 2025. Putting together it entails a capex of Rs 4,000-4,500 crores (including for existing plans) each year in fiscal 2024 and 2025. The capex will be funded through internal accruals, surplus liquidity, and debt.
The financial risk profile continues to remain robust, as indicated by gearing of 0.14 time supported by healthy liquid surplus of around Rs 7,305 crore as of June 30, 2023.
The ratings continue to reflect the strong business risk profile of SCL, backed by its established market position in northern India, increasing presence in eastern India and entry in the southern and western markets along with cost-efficient operations. The ratings also factor in its strong financial risk profile. These strengths are partially offset by susceptibility to risk of volatility in input cost and realisation, commoditised and cyclical nature of the cement industry. Any substantial, debt-funded capex or acquisition, which may weaken the financial risk profile, will be a key rating sensitivity factor.
Further, CRISIL Ratings has taken note of the recent surveys being conducted by the Income Tax (IT) department on various premises of Shree Cement Limited (Shree Cement) and variations in its share price since June 21, 2023. Similarly, CRISIL Ratings has also taken cognizance of the recent order of inspection dated July 19, 2023, under section 206(5) of the Companies Act, 2013, issued by Ministry of Corporate Affairs (MCA). CRISIL Ratings keeps all its outstanding ratings under continuous surveillance. Any adverse regulatory action or financial liability arising out of the surveys or inspection could be a rating sensitive factor and will thus be monitored closely. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of SCL and its subsidiaries for the rating assessment as the entities have significant business and financial linkages and are under a common management. All these entities are collectively referred to herein as SCL.
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 market position SCL started operations in 1979 at its first greenfield cement plant in Beawar, Rajasthan. Presently, it is the third largest cement company in India with domestic operational capacity of 49.9 MTPA as of June 30, 2023. From 100% of its capacity being in north India until 2014, SCL has diversified geographically over the past few years and now has capacities in the north (49% of total capacity) – Rajasthan, Uttarakhand and Haryana; east (35%) - Bihar, Chhattisgarh, Jharkhand, West Bengal and Odisha; south (6%) –Karnataka; west (6%) – Maharashtra and central India (4%) – Uttar Pradesh. The company further diversified its presence in the global market by acquiring Union Cement Company (PJSC) (UCC), a cement company based in Ras-Al-Khaimah, UAE. SCL adopts a multi-brand strategy (comprising brands such as Shree Jung Rodhak, Shree, Bangur, Bangur Power, Roofon and Rockstrong), which allows it to cater to different segments. Increased scale and improved geographical access to eastern India and entry in the western market will further enhance its market position. Additionally, UCC’s plant is in close proximity to the Saqr port in Ras-Al-Khaimah, which provides direct access to export markets in the Arabian Gulf, the Middle East and East Africa. Thus, SCL remains less vulnerable to the vagaries of a single regional market.
Healthy operating profitability, led by cost efficiency SCL is among the most efficient players in the cement industry. Its operating efficiency arises from sharp focus on operations, low power consumption and majority sale of blended cement, resulting in reduced energy consumption and low raw material per tonne of cement. Also, selling expense is modest because of proximity to end-user markets and use of split-grinding units. The company has total power generation capacity of 888.6 MW. Flexibility in the power plants (to switch to grid or to shut down plant based on merchant tariff) and ability to operate with multiple fuels results in cost-competitive generation in a dynamic scenario. Owing to these factors, SCL has healthy operating profit per tonne of cement in the industry.
Strong financial risk profile, driven by robust cash flow The financial risk profile should remain strong supported by strong cash accrual of over Rs 3,000 crore expected in fiscal 2024 and liquidity of Rs 7,305 crore as on June 30, 2023. Gearing was 0.14 times (based on gross debt) as on March 31, 2023. Major portion of the proposed capex of Rs 8,000- 9,000 crore by fiscal 2025 will be largely funded through cash accrual and surplus liquidity.
Weakness: Susceptibility to risks relating to input cost, realisations and cyclicality in the cement industry Capacity addition in the cement industry tends to be sporadic because of long gestation period for setting up facility and the 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 susceptible to volatility in the prices of inputs, including raw material, power, fuel and freight. Increase in pet coke prices during fiscal 2022 and 2023 impacted the profitability of several cement players. Realisations and profitability are also affected by demand, supply, offtake and other regional factors. |
Liquidity: Superior Liquidity remains robust, aided by sufficient cash accrual and surplus cash and cash equivalent (including liquid investments) of Rs 7,305 crore as on June 30, 2023. Cash accrual is projected at over Rs 3,000 crore in fiscal 2024 and at Rs. 3,000- Rs. 4,000 crore over the medium term which will be sufficient to cover the working capital and capex requirements.
ESG profile CRISIL Ratings believes the environment, social and governance (ESG) profile of SCL supports its already strong credit risk profile.
The cement sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption as cement manufacturing process is energy intensive and its high dependence on natural resources such as limestone and coal as key raw materials. The sector has social impact due to its nature of operations affecting local community and health hazards involved. However, SCL has continuously focused on mitigating its environmental and social risks.
Key ESG highlights of SCL:
There is a growing importance of ESG among investors and lenders. SCL’s commitment to ESG will play a key role in enhancing stakeholder confidence and access to capital markets. |
Outlook: Stable SCL will continue to benefit from its strong market position and geographically diversified presence in India. Healthy revenue growth and profitability will lead to adequate cash accrual and cash surplus, ensuring that the financial risk profile remains strong. |
Rating Sensitivity factors Downward factors
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About the Company SCL was incorporated in 1979 by the Kolkata-based BG Bangur group for setting up a greenfield cement plant in Beawar, with capacity of 0.6 mtpa of portland cement. SCL is the flagship company of the BG Bangur group and had domestic cement capacity of 49.9 mtpa as on June 30, 2023.
In July 2018, SCL acquired 97.61% stake in UCC, which then had clinker capacity of 3.3 mtpa and cement capacity of 4.0 mtpa (presently 3.3 mtpa and 4.8 mtpa respectively). UCC deals with a variety of cement including ordinary portland cement, sulphate-resisting cement and oil-well cement.
For the year ended March 31, 2023, SCL reported profit after tax (PAT) of Rs 1,269 crore and operating income of Rs 17,732 crore, against Rs 2,337 crore and Rs 14,908 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators of SCL (consolidated; CRISIL Ratings-adjusted numbers):
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Fund-based limit consists of cash credit/working capital demand loan/buyer's credit/short-term loan ^Yet to be placed |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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