Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities and fixed deposit program of The KCP Limited (KCP; a part of the KCP group) to ‘Negative’ from ‘Stable’ while reaffirming the ratings at ‘CRISIL A+’. The rating on the short-term bank facilities has been reaffirmed at 'CRISIL A1'.

 

The revision in outlook reflects CRISIL Ratings’ expectation that the business risk profile of the company may weaken in case the suboptimal profit margins remains constrained either owing to inability in raising the realisations in key segments or prolonging of input cost pressures resulting in moderation of credit risk profile. The cement industry witnessed pressure on cost and margins  during fiscal 2023, however, the input costs have started to abate of late. Therefore, extent of margin recovery while maintaining volume growth at an overall level would be a key monitorable.

 

Operating performance during FY23 moderated significantly. In the cement segment, the volume during first nine months of 2023 stood at 23.7 lakh tonnes as compared to 30.7 lakh tonnes in fiscal 2022 with realisation declining by 1.7% during the same period. Further, high power & fuel cost led to learnings before interest and taxes (EBIT) loss of Rs 28 crore during 9M FY23 against EBIT of Rs 190 crore during FY22. In the sugar segment, while realisations increased by 13% during the first nine months of fiscal 2023, but EBIT margin dropped to 14.4% against 30.3% in fiscal 2022 owing to higher procurement cost.

 

On account of moderation in operating performance, the debt protection metrics are estimated to have moderated in fiscal 2023 with the interest coverage ratio projected around 4.67 times in fiscal 2023 from 11.99 times in fiscal 2022 and net cash accruals to adjusted debt ratio dropping to 0.36 times in fiscal 2023 against 0.69 times in previous fiscal. However, the metrics still remain healthy for the ratings and the cash accruals generated will be sufficient to meet the debt repayment obligation comfortably. Further, cash and cash equivalents stood healthy at around Rs 638 crore as on December 31, 2022 at a consolidated level and company remains net cash positive.

 

The ratings continue to factor in the group’s established track record in the cement segment in South India and the sugar sector in Vietnam and healthy financial risk profile indicated by low gearing. These strengths are partially offset by sub-par performance of the engineering segment and susceptibility to business cycles and continuing demand-supply mismatch in the South Indian cement markets.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of KCP, KCP Vietnam Industries Ltd (KCP Vietnam) and the joint venture Fives Cail KCP Ltd. This is because the three entities, collectively referred to as the KCP group, have common management and financial linkages.

 

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 track record in the cement and sugar businesses

The KCP group has been in the cement business for over six decades. While the cement division is estimated to have witnessed flat volume growth during fiscal 2023, the company continues to have significant market footprint in the Andhra Pradesh and Telangana markets. Further, the volumes may increase over the medium term with ramping up of the packing plant at Arakkonam in Tamil Nadu. Profitability in the segment remained weak during 9MFY23 primarily due to high power cost resulting in EBIT margin of -ve 2.5% vs 12.8% in FY22. However, performance is expected to improve as coal prices have corrected significantly over the past few months from their peak which shall aid margin recovery.

 

The group also has sugar crushing capacity of 11,000 tonne per day (tpd) in Vietnam housed under the subsidiary i.e. KCP Vietnam. Revenue from this segment is 20-30% of the overall revenues. Performance of the sugar business remained flat in fiscal 2023 as unusual rains delayed harvest. However, performance is expected to improve in fiscal 2024 owing to healthy yield and continued government support to local producers in Vietnam.

 

Healthy financial risk profile

Financial risk profile is backed by steady cash accrual, healthy capital structure and comfortable debt protection metrics. Gearing is estimated to have been healthy at below 0.30 time as on March 31, 2023. Cash accruals projected at more than Rs 200 crore in fiscal 2024 should comfortably meet the scheduled repayment obligation of Rs 52 crore.

 

Weaknesses: 

Weak performance of the engineering and hotel businesses

The engineering and capital goods industry is highly vulnerable to economic cycles owing to linkages to the capital expenditure (capex) plans of customers, which are affected by slowdown in industrial growth. Despite healthy order book, profitability of the engineering division may remain subdued because of intense competition.

 

The company also has operations under the hospitality segment since April 2016.(via a four star hotel – Mercure in Hyderabad). The occupancy rate of the hotel improved during first nine months of fiscal 2023 along with increase in average room rate as it recovered from the Covid-19 pandemic led disruptions. However, this segment remains inherently weaker than sugar and cement.

 

Although, performance in both the aforementioned segments is expected to improve in fiscal 2024, but overall impact on the financial risk profile is expected to be minimal, as contribution from these segments is low in terms of revenue and profitability.

 

Susceptibility to business cycles and continuing demand-supply mismatch in South Indian cement markets

Capacity addition in the cement industry tends to be sporadic because of the long gestation period for setting up a facility and numerous players adding capacity during the peak of a cycle. This has led to unfavourable price cycles for the sector in the past. Moreover, profitability remains exposed to volatility in input prices, including raw material, power, fuel and freight. Increase in coal and pet coke prices in the second half of fiscal 2022 and during fiscal 2023 impacted the profitability of all cement players. Realisations and profitability are also affected by demand, supply, offtake and regional factors.

Liquidity: Strong

Cash accrual, projected at around Rs 200 crore in fiscal 2024, will sufficiently cover debt obligation of around Rs 52 crore. Cash and cash equivalents stood at around Rs 638 crore as on December 31, 2022. Utilisation of fund-based working capital limit was around 70% on average during the six months through February 2023 resulting in strong liquidity.

Outlook: Negative

The business risk profile of the company may weaken in case the suboptimal profit margins do not recover either owing to inability in raising the realisations in key segments or prolonging of input cost pressures resulting in moderation of credit risk profile.

Rating Sensitivity factors

Upward factors

• Higher than expected cash generation, driven by better than expected performance in cement division and healthy performance in sugar segment
• Sizeable increase in scale of business such that operating performance improves and result in EBITDA margin of over 20% on a sustained basis

 

Downward factors

• Deterioration in business risk profile owing to slowdown in either cement segment or sugar segment leading to EBITDA margin of less than 10% on a sustained basis.
• Weakening in financial risk profile resulting in net debt to EBITDA sustaining above 3.5 times either on account of lower profitability or due to debt funded capex/acquisition in existing or new business

Environment, social and governance (ESG) profile 

KCP’s ESG profile supports its healthy credit risk profile.

The cement sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption. This is because of the energy intensive cement manufacturing process 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 causing health hazards. KCP has focused on mitigating its environmental and social risks

Key ESG highlights:

• The company has target for key performance indicators for each business segment pertaining to ESG and established management systems which entail regular monitoring of environmental KPI and reviewing the progress of same on regular basis.
• The company’s CSR initiatives include education, healthcare, sustainable livelihoods, women empowerment, rural infrastructure development among others around our areas of operations.
• The company has developed a procedure for sustainable sourcing of energy, water and transportation while also increasing the usage of alternate fuels.
• The governance structure is characterised by 50% of the board members being independent directors

 

There is growing importance of ESG among investors and lenders. KCP’s commitment to ESG will play a key role in enhancing stakeholder confidence, given access to domestic capital markets.

About the Company

The KCP group was founded in 1941 by Mr V Ramakrishna, a first-generation entrepreneur who began operations by setting up a sugar unit. The cement division commenced operations in 1958 and has two units, one each at Macherla, Guntur district (capacity of 0.825 million tonnes per annum [MTPA]), Muktyala (3.52 MTPA) in Andhra Pradesh and one packaing plant at Arakkonam (0.3 MTPA) in Tamil Nadu. The heavy engineering division, set up in 1955 at Tiruvottiyur in Chennai, undertakes casting, fabrication and machining of heavy equipment for core industries (sugar, cement, steel and power). KCP Vietnam Industries Ltd, which commenced operations in 1999, has a sugar crushing capacity of 11,000 tpd. The group also has a 127-room four-star hotel in Hyderabad named ‘Mercure’, which began operations in April 2016.

 

For the nine months ended December 2022, consolidated profit after tax (PAT) for the company was Rs 35 crore on operating income of Rs 1,656 crore compared with PAT of Rs 180 crore on operating income of Rs 1,566 crore for the corresponding period of the previous fiscal.

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	112.35	NA	CRISIL A+/Negative
NA	Fixed deposits	NA	NA	NA	125	Simple	CRISIL A+/Negative
NA	Letter of credit & Bank Guarantee	NA	NA	NA	148	NA	CRISIL A1
NA	Proposed Cash Credit Limit	NA	NA	NA	44.71	NA	CRISIL A+/Negative
NA	Proposed Letter of Credit & Bank Guarantee	NA	NA	NA	25	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	100	NA	CRISIL A+/Negative
NA	Short Term Loan	NA	NA	NA	20	NA	CRISIL A1
NA	Term Loan	NA	NA	Apr-26	14.8	NA	CRISIL A+/Negative
NA	Term Loan	NA	NA	Sep-25	115.1	NA	CRISIL A+/Negative