Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to the short-term bank facilities of Star Cement Ltd (SCL) and reaffirmed its ‘CRISIL AA/Stable’ rating on the long-term bank facilities of the company.

 

The rating continues to reflect CRISIL Ratings’ belief that the company’s market leadership in north-east India will strengthen further in the near term with commissioning of 3 MTPA clinker and 2 MTPA grinding unit by end of current fiscal. This will enable additional sales volumes along with sustained healthy operating profitability and robust financial risk profile thereby improving its overall credit profile. The successful commissioning of these facilities and their timely stabilization & ramp-up would be a key monitorable.

 

The company initially planned to incur capex of Rs 2,800 crore to increase its grinding capacity by 4 million tonne per annum (MTPA) and clinker capacity by 3 MTPA to improve its market share in the north-east. Significant progress has been achieved on the expansion plants, with the 2 MTPA grinding unit in Guwahati and 3 MTPA clinker unit in Meghalaya expected to be commissioned by end of fiscal 2024. The cost of the project is also revised downward to approx. Rs 2,300 crore owing to sooner than expected progress. The commissioning of these facilities will result in higher scale of operations and full balancing of cement and clinker capacities, thereby enabling higher utilization and strengthening of the business risk profile of the company. The capex will be funded through internal accruals and external borrowings. With negligible debt and healthy cash surplus of approximately Rs 110 crore as of December 31, 2023, the company is expected to maintain strong credit metrics despite the debt which is expected to be raised for the capex.

 

For fiscal 2023, SCL recorded revenue of Rs 2,708 crore at a consolidated level, driven by 18% on-year increase in volume to 4.01 million tonne from 3.39 million tonne due to healthy demand in the core north-eastern region. During the period, despite a sharp increase in power, fuel and freight costs, SCL maintained healthy earnings before interest, depreciation, tax and amortisation (Ebitda) margin of 17.5% and Ebitda per tonne of Rs 1,180. The strong operating performance continued during nine months of fiscal 2024, with sales volume growing by 8.3% over nine months of fiscal 2023, to 3.01 million tonne. Over the same period, EBITDA per ton increased by Rs 163, to Rs 1,252, owing to reduction in raw material and freight costs.

 

The ratings factors strong brand recall of the company in the north-east region along with the robust profitability. These strengths are partially offset by susceptibility to volatility in input prices, the commoditised nature of the product and exposure to risks associated with the sizeable, ongoing capital expenditure (capex).

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SCL and its subsidiaries, collectively referred to as SCL herein. This is because all the companies are in the same or related businesses, have a common management and fungible cash flow.

 

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 and brand, and lesser competition in north-east India: SCL is a leading cement player in north-eastern India, supported by its strong brand. It had volume market share of ~24% as of March 31, 2023, in the region. Owing to its strength as a local brand, the company has been able to command higher prices compared with its peers in the region as reflected in its industry-leading blended realisations. SCL has also diversified its revenue in eastern India (primarily north-West Bengal and east Bihar), which contributed around 28% to sales volume in fiscal 2023.

 

Furthermore, competitive intensity is comparatively low in the north-eastern region as some of the pan-India players do not have manufacturing base in the region and transporting cement from outside the region is not economically viable owing to the high freight costs in the hilly terrain. This gives local players such as SCL an edge in terms of higher pricing flexibility.

 

• Healthy operating profitability: SCL has maintained healthy profitability over the years, as indicated by average Ebitda per tonne of more than Rs 1,450 over the decade through fiscal 2023, owing to better pricing flexibility, financial incentives and cost-efficient operations. While operating profitability has moderated over the past 3-4 years owing to sunset of freight incentives and increase in sales volume outside the northeast (which fetch lower margins), it remained healthy above Rs 1,000 per tonne. Benefits from waste heat recovery system (WHRS) of 12 MW, efficient kilns, higher prices and SGST incentives on sales from grinding unit in Assam should mitigate the impact of any increase in power and fuel costs and expiration of GST-related incentives on existing units.

 

• Robust financial risk profile with strong debt protection metrics: SCL had negligible debt and healthy networth of Rs 2,412 crore as on March 31, 2023. While the company is expected to borrow to fund the ongoing sizeable expansion of Rs 2,300 crore, it is likely to maintain strong capital structure and healthy debt protection metrics owing to healthy cash balance of approximately Rs 110 crore as on December 31, 2023, and strong cash accrual. Also, it has a track record of bringing down debt post commissioning of new capacities. Higher-than-expected leverage as a result of either new expansion or any potential acquisition will be a monitorable.

 

Weaknesses:

• Geographical concentration and small scale of operations: SCL is a regional player, with more than 71% of its sales volume being in the north-east, rendering the company vulnerable to demand and supply patterns in the region. However, the company is steadily diversifying in eastern India to reduce the geographical concentration. While favourable demand scenario and strong brand positioning are strong mitigating factors, geographical concentration will remain a risk over the medium term. Additionally, SCL has small (though growing) capacity compared with established, pan-India players.

 

• Susceptibility to volatility in input prices and cyclicality in the cement industry: Raw material, fuel (coal) and freight costs constitute more than 80% of the company’s total cost of production. Any rise in input prices exerts pressure on operating profitability, as has been the case in fiscal 2023. Furthermore, the commoditised nature of product limits pricing power and the company may not be able to pass on any significant increase in input prices entirely.

 

The cement industry is cyclical and it takes 3-4 years to operationalise and stabilise new capacity. Also, capacity expansion is lumpy, with most players setting up capacities simultaneously in anticipation of demand growth. This lumpiness in capacity addition and the fact that setting up small capacities is not often viable lead to oversupply in the initial years after the capacities become operational. Thus, the domestic cement industry faces excess supply every 3-4 years.

Liquidity: Strong

SCL has strong liquidity driven by cash and bank balance at approximately Rs 110 crore as of December 31, 2023 and expected accrual of close to Rs 480 crore in fiscal 2024. Further cushion is available in the form of partially utilised fund-based bank lines of Rs 151 crore. SCL has negligible debt as on  December 31, 2023. While SCL will dip into its cash balance to fund the equity portion of capex, it is expected to maintain liquidity of ~Rs 100-150 crore approx in the form of cash or unutilised bank lines going forward.

Outlook: Stable

CRISIL Ratings believes SCL will maintain a strong credit risk profile over the medium term on back of its strong credit metrics and with commencement of additional capacities, resulting in increased scale of operations and superior cash accruals.

Rating Sensitivity factors

Upward factors:

• Meaningful diversification into 2 or more regions resulting in significant improvement in scale and market share while sustaining strong operating performance.
• Maintenance of robust balance sheet with low gearing after the capex phase.

 

Downward factors:

• Slower-than-expected ramp-up of new capacities or material delays in completion of the capex.
• Any substantial debt-funded capex or acquisition or decline in profitability resulting in net debt to Ebitda ratio above 2-2.5 times on a sustained basis.

About the Company

Based in Lumshnong (Meghalaya), SCL (formerly Cement Manufacturing Company Ltd [CMCL]) was earlier a subsidiary of Century Plyboard (India) Ltd (CPIL). It commenced operations in December 2004. After a demerger in April 2012, CPIL transferred its cement, ferroalloy and power divisions to Star Ferro and Cement Ltd (SFCL), which held 70.5% in CMCL. In March 2015, the businesses were further demerged. The ferroalloy and power businesses were transferred to Shyam Century Ferrous Ltd (SCFL). SCL got its present name in June 2016. In August 2016, the board approved reverse merger of SFCL into SCL, which was completed in the first quarter of fiscal 2018, post which SCL, the operating company has become the listed parent company.

 

SCL has a combined cement manufacturing capacity of 5.70 MTPA, clinker manufacturing capacity of 2.80 MTPA, 12.3 MW WHRS and a captive power plant with capacity of 51 MW as of December 31, 2023.

 

For the nine months ended December 31, 2023, SCL reported profit after tax (PAT) of Rs 207.4 crore and operating income of Rs 1,997.1 crore, against Rs 151.5 crore and Rs 1875.7 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable