Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank loan facilities and debt programmes of Shree Cement Ltd (SCL).

 

The ratings continue to reflect the strong business risk profile of SCL, backed by its established market position in northern India, and increasing presence in the eastern and southern regions, along with cost-efficient operations. The ratings also factor in the company’s strong financial risk profile. These strengths are partially offset by susceptibility to risk of volatility in input cost and realisation, and the commoditised and cyclical nature of the cement industry. Also, any substantial, debt-funded capital expenditure (capex) or acquisition, which may weaken the financial risk profile, will be a key rating sensitivity factor.  

 

SCL commissioned units at Nawalgarh and Guntur in January and April 2024 respectively taking its total installed domestic cement capacity to 56.4 million tonne per annum (MTPA) as on June 30, 2024. In fiscal 2024, consolidated sales volume improved by 14.5% in fiscal 2024 over fiscal 2023, as the company ramped up its new capacity on back of strong demand.

 

The financial risk profile remains strong, as indicated by comfortable gearing and healthy net cash position of around Rs 6,500 crore as of March 31, 2024. The company has sizeable capex plans to achieve the intended target of reaching domestic cement capacity of 80 MTPA by fiscal 2028, through a mix of greenfield and brownfield expansions. The company is expected to incur capex of around Rs 13,000 crore over fiscals 2025-2027 towards this, to be largely funded from internal accruals and existing liquidity, which will keep the debt protection metrics comfortable over the medium term.

 

CRISIL Ratings has taken note of the surveys conducted by the Income Tax (IT) department on various premises of SCL during fiscal 2024. Similarly, CRISIL Ratings has also taken cognizance of the order of inspection dated July 19, 2023, under section 206(5) of the Companies Act, 2013, issued by the 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. It is the third largest cement company in India with domestic operational capacity of 56.4 MTPA as of June 30, 2024. 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) –east (31%), south (11%), west (5%) and central India (4%). 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 has revamped its marketing strategy to offer all its products under a single master brand as ‘Bangur’, and launched its premium product offering under Bangur Magna brand, allowing it to cater to different segments more efficiently.

 

The company aims to reach 80 MTPA domestic cement capacity by fiscal 2028 by setting up units across regions. Increased scale and geographical access to eastern, southern and central regions will further support diversification and 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 is 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 lower energy consumption and low raw material requirement 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 983 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. Consolidated earnings before interest, tax, depreciation and amortization (EBITDA) per tonne (including contribution from power segment and its UAE subsidiary) improved to Rs 1,155 in fiscal 2024 from Rs 855 in fiscal 2023 largely owing to moderation in power and fuel costs. It is expected to sustain above Rs 1,100 over the medium term supported by efficiency improvement measures being implemented by the company.

 

• Strong financial risk profile, driven by robust cash flow: The financial risk profile should remain strong supported by expected annual cash accrual of over Rs 4,000 crore over the medium term. Strong networth and modest debt of Rs 1,475 crore resulted in gearing remaining comfortable at 0.07 times as on March 31, 2024. Further, the company had liquidity of around Rs 7,980 crore as on March 31, 2024. Major portion of the expected capex of ~Rs 13,000 crore over fiscal 2025-2027 will be largely funded through cash accrual and surplus liquidity, limiting the need of any major debt additions and this sustaining its strong debt protection metrics.

 

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 sizeable cash and equivalent (including liquid investments) of Rs 7,980 crore as on March 31, 2024. Cash accrual is projected at over Rs 4,000 crore per annum over the medium term will be sufficient to cover the working capital and capex requirements. Moderate utilisation on bank limits of ~Rs 4,000 crore provides additional liquidity cushion.

 

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:

• SCL targets to reduce scope 1 emissions by 12.7% and scope 2 emissions by 27.1% per tonne of cementitious material by 2030 over 2019 baseline. This target is in-line with Science Based Target Initiative guidelines.
• Further, as part of its RE 100 initiative the company aims to source its electricity requirement from renewable sources by 2050. In fiscal 2024, ~56% of its electricity requirement was met from renewable sources.
• The company’s thermal substitution rate within kilns stood at 2.4% in fiscal 2024, which is lower compared to 3.5% in fiscal 2023.
• SCL’s lost time injury frequency rate stood at 0.14x for employees and 0.10x for workers in fiscal 2024, compared with 0.10x for employees and 0.11x for workers in fiscal 2023.
• Its governance structure is characterized by ~63% of its board being independent directors, one-woman board member, and expensive financial disclosures.

 

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

• Inorganic growth plan or larger-than-expected capex in an adverse operating environment
• Decline in operating performance, resulting in the net debt to EBITDA ratio weakening to more than 1.0 time on a sustainable basis.

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 56.4 mtpa as on June 30, 2024.

 

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.

Any other information: Not Applicable