Rating Rationale
December 28, 2023 | Mumbai
Star Cement North East Limited
Rating upgraded to 'CRISIL AA/Stable'
 
Rating Action
Total Bank Loan Facilities RatedRs.400 Crore
Long Term RatingCRISIL AA/Stable (Upgraded from 'CRISIL AA-/Positive')
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 upgraded its rating on the bank facilities of Star Cement North East Ltd (SCNEL) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive'.

 

SCNEL is a wholly owned subsidiary of Star Cement Ltd (SCL; ‘CRISIL AA/Stable’) and is yet to commence operations. SCNEL is setting up a cement grinding capacity of 2 million metric tonne per annum (MTPA) in Sonapur, Assam, at a budgeted cost of Rs 580 crore. The project is expected to be commissioned by end of fiscal 2024.

 

The rating considers strategic importance of SCNEL to SCL and centrally factors the strong operational, managerial and financial support SCNEL will receive from SCL on an ongoing basis. These strengths are partially offset by risks associated with the sizeable, ongoing capex.

 

The rating upgrade on the long-term bank facility of SCNEL is driven by a similar rating action on the parent SCL. The rating upgrade of SCL reflects 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.

 

SCL plans to incur capital expenditure (capex) of approx. Rs 2,300 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 under SCNEL and 3 MTPA clinker unit in Meghalaya expected to be commissioned by end of fiscal 2024. The capex will be funded through internal accruals and external borrowings. With negligible debt and a healthy cash surplus of approximately Rs 237 crore as of September 30, 2023, the company is expected to maintain strong credit metrics despite the debt which is expected to be raised for capex.

Analytical Approach

CRISIL Ratings has applied its criteria for notch-up of rating based on parent support. This is owing to the strategic importance of SCNEL to SCL, and its 100% ownership and common management by the parent.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong support from the parent, SCL: SCL will have high operational, managerial and financial integration with its subsidiary, SCNEL. The parent holds 100% stake in SCNEL, thus giving it complete control over the operations. SCL intends to infuse funds for the upcoming capacity of SCNEL and could also extend corporate guarantee for the debt to be raised for the project. Further, the grinding unit of SCNEL will receive clinker from the Lumshnong plant of SCL; this will result in SCL achieving full balance between its clinker and grinding capacities at an overall level.

 

The parent is expected to maintain its stance of financial and managerial support to the company, given its strategic importance to SCL. Further, the rating of SCNEL will remain sensitive to the credit rating of SCL.

 

  • Strategic importance to SCL: The capacity addition undertaken in SCNEL is strategic from the perspective of SCL as the commissioning of a 2-MTPA grinding unit (expected to commence commercial operations by end of fiscal 2024) would further strengthen the market position of SCL in northeast India; the subsidiary will form around 20% of the expected combined capacity of 9.7 MTPA of the parent..

 

SCNEL’s plant will also be eligible for state government incentives such as refund of State Goods and Service Tax for up to 200% of the cost of machinery, factory building land & site development. This would, in turn, boost the operating profitability of SCL.

 

Weakness:

  • Project implementation risk: SCNEL is undertaking a capex of around Rs 580 crore to set up a 2-MTPA grinding unit, which should commence commercial operations by end of fiscal 2024. The capex is likely to be funded through a term loan of Rs 375 crore and balance through funds infused by SCL; financial closure for the project is yet to be achieved. This exposes SCNEL to risks associated with funding and implementation of the project. This risk is mitigated to an extent by track record of the management in successfully tying up funds from lenders and setting up similar projects in the past. Timely commencement of operations within budgeted costs will, however, remain a key monitorable.

Liquidity: Strong

Liquidity of SCNEL derives strength from the overall liquidity of SCL. In turn, SCL has robust liquidity, driven by cash and bank balance at approximately Rs 237 crore as on September 30, 2023, and cash accrual of close to Rs 480 crore projected for fiscal 2024; also, SCL has negligible debt as on September 30, 2023. Further cushion is available in the form of partially utilised fund-based bank lines worth Rs 151 crore. While SCL will dip into its cash balances to fund the desired equity portion of the capex projects, it is expected to maintain liquidity of ~Rs 100-150 crore in form of cash or unutilised bank lines.

 

This will enable SCL to comfortably fund the required equity contribution towards the capex project of SCNEL. Further, SCL plans to extend corporate guarantee for the loans raised by SCNEL to fund the project.

Outlook: Stable

The outlook on the long-term bank facility of SCNEL reflects the rating outlook of the parent, SCL. 

 

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:

  • Upgrade in the credit rating of the parent, SCL, by 1 notch or more

 

Downward factors:

  • Downgrade in the credit rating of SCL by 1 notch or more
  • Deterioration in the shareholding or support philosophy of the parent towards SCNEL

About the Company

SCNEL, incorporated in May 2021, is a wholly-owned subsidiary of SCL. SCNEL is yet to commence operations and is setting up a 2-MTPA cement grinding capacity in Sonapur at a budgeted cost of Rs 580 crore. The project is expected to commission by end of fiscal 2024.

About the Group

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 September 30, 2023.

Key Financial Indicators (SCNEL)*

As on / for the period ended March 31

 

2023

2022

Revenue

Rs crore

NA

NA

Profit after tax (PAT)

Rs crore

NA

NA

PAT margin

%

NA

NA

Adjusted debt/adjusted networth

Times

NA

NA

Interest coverage

Times

NA

NA

   *Company is non-operational as on date and is expected to commence operations by January 2025

 

Key Financial Indicators (SCL: Consolidated)

As on / for the period ended March 31

 

2023

2022

Revenue

Rs crore

2,708

2,222

PAT

Rs crore

246

245

PAT margin

%

9.1

11.0

Adjusted debt/adjusted networth

Times

0.01

0.01

Interest coverage

Times

54.1

28.4

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs.Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Capex Letter of Credit NA NA NA 50 NA CRISIL AA/Stable
NA Proposed Term Loan NA NA NA 350 NA CRISIL AA/Stable
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 350.0 CRISIL AA/Stable 16-06-23 CRISIL AA-/Positive   --   --   -- --
      -- 24-01-23 CRISIL AA-/Positive   --   --   -- --
Non-Fund Based Facilities LT 50.0 CRISIL AA/Stable 16-06-23 CRISIL AA-/Positive   --   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Capex Letter Of Credit 50 IndusInd Bank Limited CRISIL AA/Stable
Proposed Term Loan 350 Not Applicable CRISIL AA/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
Rating Criteria for Cement Industry
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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