Detailed Rationale

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

 

The revision in outlook reflects recovery in the operating margins of the key segment in the first nine months of fiscal 2024 and expectation of further improvement over the medium term. The improved operating margins is expected to lead to sustained business risk profile. In the cement segment, earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne stood over Rs 300 in the first nine months of fiscal 2024 compared with Rs 30 during the corresponding period of fiscal 2023. The improvement was owing to reduction in power and fuel cost as coal prices started cooling down from the second half of fiscal 2023. Ebitda per tonne is expected to further increase over medium term with the company undertaking cost efficiency measures. In the sugar segment, the earnings before interest and tax (Ebit) margin remained healthy at 16.6% in the first nine months of fiscal 2024 as against 14.3% a year earlier and expected to remain healthy over the medium term.

 

The company has healthy financial risk profile and continues to remain net cash positive. Debt protection metrics are also expected to remain healthy with adjusted interest coverage and net cash accruals to adjusted debt ratios expected around 9.0 times and above 0.4 time, respectively, in fiscal 2024. Cash accruals will be sufficient to meet the debt repayment obligation comfortably. Further, cash and equivalents were healthy around Rs 750 crore as on December 31, 2023 at consolidated level.

 

The ratings reflect established track record of the group in the cement segment in southern region 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 southern region.

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 all these 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. The cement division has witnessed volume growth during the first nine months of fiscal 2024 with company having significant market footprint in the Andhra Pradesh and Telangana markets. However, in absence of major capacity addition, the volume growth is expected to be at lower rate over the medium term. Profitability in the segment recovered during nine months of fiscal 2024 primarily due to low power cost resulting in Ebitda per tonne of Rs 300 (Rs 30 during the corresponding period of the previous fiscal) and it is expected to sustain over the medium term.

 

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 accounts for 30-40% of the overall revenues. 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 2025 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, healthy capital structure and comfortable debt protection metrics. The company continues to be net cash positive. Adjusted gearing is estimated to have been healthy at below 0.4 time in fiscal 2024. Cash accruals projected at more than Rs 275 crore in fiscal 2024 should comfortably meet the scheduled repayment obligation of Rs 86 crore.

 

Weaknesses:

• Weak performance of the engineering segment: 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. The engineering segment of the company has incurred EBIT loss for the past few years. Despite healthy order book, profitability of the engineering segment may remain subdued because of intense competition. The segment remains inherently weaker than sugar and cement segment.

 

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 business cycles and continuing cement demand-supply mismatch in southern region: 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 275 crore in fiscal 2024, will sufficiently cover debt obligation of around Rs 86 crore. Cash and cash equivalents stood at around Rs 750 crore as on December 31, 2023. Utilisation of fund-based working capital limit was around 53% on average during the six months through December 2023 resulting in strong liquidity.

Outlook: Stable

The business risk profile of the company will continue to sustain its operating performance and healthy financial risk profile, backed by its strong market position in cement and sugar business.

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 Environment, Social, and Governance (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 energy intensive cement manufacturing process and its high dependence on natural resources such as limestone, coal as key raw materials. The sector has social impact due to its nature of operations affecting local community and health hazards involved. KCP has focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• The company has taken steps for utilising alternate sources of energy such as installing renewable energy power plants, use of alternative fuels for clinker production and power generation and increase in capacity of waste heat recovery power plants.
• The corporate social responsibility (CSR) initiatives of the company primarily focus on areas such as education, health, sanitation, drinking water, malnutrition, digital literacy, infrastructure facilities.
• Presently, the company is using up to 32% of flyash in cement manufacturing and planning to increase it upto 35%.
• 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. The operating performance of the hotel segment has improved over the past two years and expected to remain healthy.

 

As on December 31, 2023, operating income of the company stood at Rs 2,222 crore and profit after tax (PAT) was Rs 193 crore compared with Rs 1,656 crore and Rs 35 crore, respectively, a year earlier.

Any other information: Not Applicable