Rating Rationale
June 30, 2020 | Mumbai
Star Cement Limited
Rating Reaffirmed 
 
Rating Action
Rs.30 Crore Commercial Paper  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its short term rating of CRISIL A1+ to the commercial paper program of Star Cement Limited (SCL).
 
The ratings reflects the company's leadership position in the north-eastern region, healthy operating profitability, and a robust financial risk profile.  These strengths are partially offset by volatility in raw material prices, and the commoditised nature of product.
 
For fiscal 2020, the volume sales grew by around 5% despite the impact of lockdown in March of fiscal 2020; however operating income was similar yoy driven by lower realisations.
 
Due to lockdown in March 2020, the commissioning of its 2 mtpa cement grinding unit in Siliguri got delayed, it is now expected to be commissioned in the 2nd quarter of fiscal 2021, post which its capacity will go up to 6.4 mtpa. 
 
Operating performance in fiscal 2021 is likely to be impacted following measures taken by various state governments as well as central government towards containment of COVID-19. Volume sales are expected to de-grow yoy however operating profitability is expected to remain healthy driven by lower costs. Despite the weakening operating performance, the financial risk profile will remain healthy driven by almost debt free capital structure and comfortable liquidity with cash and cash equivalents estimated at over Rs 300 crore in fiscal 2020.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of SCL and its subsidiaries, Star Cement Meghalaya Ltd (SCML), Meghalaya Power Ltd (MPL), and Megha Technical and Engineers Pvt Ltd (MTEPL). This is because all these companies, collectively referred to as the Star Cement group, have a common management and intra-corporate transactions.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position and brand in north-east region, while diversifying its revenue base in the eastern region:
The group is a leading cement player in the north-eastern region, supported by its strong brand, Star Cement, with a market share of 24% in the region as on March 31, 2020. The group is also diversifying its revenue in the eastern region (primarily West Bengal and Bihar), which contributed over 25% to total revenue in fiscal 2020.
 
* Healthy financial risk profile marked by comfortable capital structure and healthy debt protection metrics:
The company has become almost debt free and total debt of the company has come down to estimated Rs 3 crores as of March 2020. The company continues to have a strong capital structure, with estimated gearing of 0.0 times and debt to EBITDA of 0.01 times.
 
Weakness
* Volatility in raw material prices adversely affecting profitability:
The company remains exposed to volatile raw material and power prices and freight costs, which constitute around 50 to 55% of cement's cost of production. Any rise in input price may moderate profitability, which was marginally affected in fiscal 2020 because of higher power and fuel costs.
 
* Commoditised nature of product with cyclicality in the cement industry:
Capacity additions in the cement business take three to four years to become operational and stabilise; also, capacity expansions are 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 viable often lead to oversupply in the initial years after the capacities become operational. Thus, the domestic cement industry faces excess supply every three to four years.
 
The Star Cement group is a regional player, making it more vulnerable to regional demand and supply patterns. Because of the limited product differentiation leading to limited pricing power, the group is not likely be able to entirely pass on any significant increase in input prices.  Cyclicality in the industry, with low pricing power, may also put pressure on the group's margin. However, the company is steadily diversifying in the eastern market to mitigate the risk of being a regional player.
Liquidity Strong

SCL has strong liquidity driven by expected cash accruals of more than Rs 200 crore per annum in fiscal 2021 and fiscal 2022 as against nil term debt obligations. Further, SCL has cash and cash equivalents estimated as on March 31, 2020 of over Rs 300 crore. CRISIL expects internal accruals, and liquid surplus to be sufficient to meet its incremental working capital requirements.

Rating Sensitivity Factor
Downward factors:
* Any large, debt-funded acquisition or capital expenditure leading to TOL/TNW deteriorating to over 1 time on a sustainable basis.
* Profitability pressures which weaken the financial risk profile

About the Group

Based in Lumshnong (Meghalaya), SCL (formerly known as Cement Manufacturing Company Ltd) was earlier a subsidiary of Cen/tury Plyboard (India) Ltd . 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 SCL. In March 2015, the businesses were further demerged. The ferroalloy and power businesses were transferred to Shyam Century Ferrous Ltd (SCFL) and the cement business to SFCL. 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. The Star Cement group has a combined cement manufacturing capacity of 4.40 million tonne per annum (mtpa; including 0.73 mtpa at its hired unit), clinker manufacturing capacity of 2.54 mtpa, and a captive power plant with a capacity of 51 megawatt.

Key Financial Indicators
Particulars Unit 2020* 2019
Revenue Rs Cr 1844 1832
Profit After Tax Rs Cr 288 305
PAT Margin % 15.5 16.1
Adjusted Debt/ Adjusted Networth Times 0.00 0.04
Interest Coverage Times 45.43 31.61
*Based on abridged financials

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue Size 
(Rs cr)		 Complexity  Levels Rating assigned
with outlook
NA Commercial Paper NA NA 7-365 days 30 Simple CRISIL A1+

Annexure - List of entities consolidated
Entities Consolidated Nature of consolidation Rationale for consolidation
Star Cement Meghalaya Ltd, Meghalaya Power Ltd, and Megha Technical and Engineers Pvt Ltd. Full consolidation All these companies, collectively referred to as the Star Cement group, have a common management and intra-corporate transactions.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  30.00  CRISIL A1+      28-06-19  CRISIL A1+  27-09-18  CRISIL A1+    --  -- 
Fund-based Bank Facilities  LT/ST    --    --    --    --  21-11-17  Withdrawal/ Withdrawal  CRISIL A/Positive 
                    31-01-17  CRISIL A/Stable/ CRISIL A1   
Non Fund-based Bank Facilities  LT/ST    --    --    --    --  21-11-17  Withdrawal  CRISIL A1 
                    31-01-17  CRISIL A1   
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Cement Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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