Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil A+/Stable/Crisil A1’ ratings on the bank facilities and fixed deposit programme of The KCP Limited (KCP; a part of the KCP group).

 

The ratings continue to factor in the established track record of the KCP group in the cement sector in the southern region of India and the sugar sector in Vietnam, and its healthy financial risk profile. These strengths are partially offset by sub-par operating performance of the cement and engineering segments, susceptibility to changing business cycles and the continued demand-supply mismatch in the cement market in South India.

 

The cement segment recorded a decline in operating income by 24% year-on-year in the first nine months of fiscal 2025, owing to lower realisations and volume. Accordingly, earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne also moderated and stood at negative Rs 99 in the first nine months of fiscal 2025, compared with Rs 313 in the corresponding period of fiscal 2024. With expected recovery in demand and price hikes undertaken, operating performance should improve from the fourth quarter of fiscal 2025. Profitability over the medium term will be further aided by cost efficiency measures undertaken by the company, through implementation of the waste heat recovery system (WHRS) and railway siding.

 

In the sugar segment, the Ebit margin stood at 28% in the first nine months of fiscal 2025 (as against 18% a year earlier), backed by healthy realisations. The margin is likely to remain healthy over the medium term.

 

The company has a healthy financial risk profile and remains net cash positive. The company is undertaking capex for implementation of WHRS and railway siding in the cement segment which will be partly debt-funded. Nonetheless, company will continue to remain net cash positive over the medium-term. Debt protection metrics should remain healthy with adjusted interest coverage and net cash accrual to adjusted debt ratios likely to be above 9.0 times and above 0.4 time, respectively, going forward. Expected cash accrual will comfortably cover the debt obligation. Cash and equivalents were healthy around Rs 819 crore as on December 31, 2024, at a consolidated level.

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. All these entities, collectively referred to as the KCP group, are under a common management and have 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 engaged in the cement business for over six decades. The company is having significant market footprint in Andhra Pradesh (AP) and Telangana. Healthy growth in volume, recorded over past few years, led to increase in capacity utilisation to over 75% in fiscal 2024. However, the company may witness de-growth in volume during fiscal 2025, owing to muted demand and the strategic decision to reduce sales in non-core markets amidst the weak pricing environment. Further, in the absence of any major capacity addition, volume may grow at moderate pace over the medium term.

 

The group has a sugar crushing capacity of 11,000 tonne per day (tpd) at Vietnam, housed under its subsidiary i.e. KCP Vietnam. This segment accounts for 35-45% of overall revenue. Performance of the sugar business remained healthy aided by increase in sugarcane area, healthy yields and higher realisation. The performance is expected to sustain in fiscal 2026 owing to increase in sugarcane area and continued government support to local producers in Vietnam.

 

• Healthy financial risk profile: Financial risk profile is backed by steady cash accrual, a healthy capital structure and comfortable debt protection metrics. Adjusted gearing is projected to remain healthy below 0.4 time as on March 31, 2025.  The company continues to be net cash positive at consolidated level.

 

Going forward, gross debt may increase with cost efficiency measures being undertaken. These include implementation of WHRS (16 MW) and railway siding, entailing capital expenditure of Rs 235 crore and Rs 102 crore, respectively. These projects should be commissioned during the second half of fiscal 2026. Even so, the company is expected to remain net cash positive over the medium term.  Expected cash accrual projected to be over Rs 250 crore in fiscal 2025 should comfortably meet the scheduled repayment obligation of Rs 52 crore.

 

Weaknesses:

• Modest operating performance of the engineering segment: The engineering and capital goods industry remains highly vulnerable to economic cycles, given the linkages to capital expenditure (capex) plans of end-user segments, which could be adversely impacted by any slowdown in industrial growth. The engineering segment has incurred an Ebit loss over the past few years. During the first nine months of fiscal 2025, the segment generated a positive Ebit; nonetheless, profitability may remain subdued, amid intense competition. This segment is inherently weaker compared to the sugar and cement segments.

 

However, the overall impact on the financial risk profile is expected to be minimal, as contribution from this segment is low in terms of revenue and profitability.

 

• Susceptibility to fluctuation in input cost and realisations, change in business cycles and the cement demand-supply mismatch in south India: Capacity addition in the cement industry tends to be sporadic because of the long gestation period for setting up a facility and numerous players tend to make capacity additions during the peak of a cycle. This has led to unfavourable price cycles for the sector in the past. Profitability of cement players moderated during the first nine months of fiscal 2025, owing to decline in cement prices and realisations. It has resulted in negative Ebitda per tonne of Rs 99 (Rs 313 during the corresponding period of the previous fiscal) for the company.

 

Realisations and profitability are also affected by the existing demand-supply scenario, offtake and regional factors. Operating profitability also remains exposed to volatility in input prices, including raw material, power, fuel and freight. The southern region is further characterised by an oversupply of cement, due to large deposits of limestone, a key raw material, as compared to demand, which has an adverse impact on realisations.

Liquidity: Strong

Expected cash accrual of around Rs 250 crore in fiscal 2025 and Rs 300-350 crore in fiscal 2026, will sufficiently cover debt obligation of Rs 30-50 crore per fiscal. Cash and cash equivalents were around Rs 819 crore as on December 31, 2024. Utilisation of fund-based working capital limit averaged around 71% during the six months through January 2025.

 

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 high dependence on natural resources such as limestone and coal, which are key raw materials. The sector has a significant social impact given that its nature of operations could negatively impact the local community and may involve health hazards. KCP has focused on mitigating its environmental and social risk by undertaking various measures.

 

Key highlights:

• The company has installed renewable energy power plants and uses alternative fuels for clinker production and power generation.
• The company is also implementing a WHRS project of 16 MW, to be commissioned in fiscal 2026.
• Through its corporate social responsibility (CSR) initiatives, the company focuses on areas such as education, health, skill development, livelihood, and women and youth empowerment.
• The governance structure is characterised by 50% of board members being independent directors.

 

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

Outlook: Stable

KCP will continue to sustain its operating performance and healthy financial risk profile, backed by its strong market position in the cement segment in South India and the sugar segment in Vietnam.

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.

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 tonne per annum [mtpa]), Muktyala (3.52 mtpa) in AP, and one packaging plant at Arakkonam (0.3 mtpa) in Tamil Nadu. The heavy engineering division was set up in 1955, at Tiruvottiyur in Chennai. This division 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.

 

As on December 31, 2024, the company reported an operating income and profit after tax of Rs 1,894 crore and Rs 182 crore, as  compared with Rs 2,222 crore and Rs 196 crore, respectively, a year earlier.

Any other information: Not Applicable