Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank loan facilities of Udaipur Cement Works Ltd (UCWL).

 

The ratings continue to reflect the strategic importance of UCWL to JK Lakshmi Cement Ltd (JKLC; CRISIL AA/Stable/CRISIL A1+') and the strong support from JKLC. The ratings also factor in UCWL's improved market position with commissioning of 2.5 million tonne per annum (MTPA) brownfield grinding capacity along with 1.5 MTPA clinker capacity, and its high financial flexibility. These strengths are partially offset by average debt protection metrics and susceptibility to volatility in input costs and cyclicality in the cement industry.

 

UCWL’s operating income increased 13% in fiscal 2024 on-year owing to increase in sales volume while realisation declined. Profitability, as measured by earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne, increased to Rs 747 (from Rs 685 in fiscal 2023) owing to decrease in input costs, especially power and fuel costs, which was partially offset by reduction in realisation.

 

For the first six months in fiscal 2025, operating income increased 31.2% on-year owing to incremental sales volume from the newly commissioned integrated cement facility even as realisation declined. The lower realisation led to moderation in Ebitda per tonne to Rs 478 per tonne (from Rs 621 in the first half of fiscal 2024). Accordingly, profitability will remain marginally lower than in fiscal 2024 with healthy improvement expected from fiscal 2026.

 

Financial leverage improved, as indicated by the decline in the net debt to Ebitda ratio to 5.8 times as on March 31, 2024, from 7.9 times a year earlier, because of better profitability and stable net debt with the company utilising rights issue proceeds to fund capital expenditure (capex). With additional debt drawn to fund the balance capex for brownfield expansion of 2.5 MTPA grinding capacity and 1.5 MTPA clinker unit, and lower profitability, the net debt to Ebitda ratio is expected to increase in the near term. The ratio will improve over the medium term with recovery in profitability and scheduled repayment of debt.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of UCWL.

 

CRISIL Ratings has applied its parent notch-up framework to factor in the support available to UCWL from its parent, JKLC, as the companies have operational and financial linkages, and common management.

 

CRISIL Ratings has treated outstanding preference shares, both cumulative redeemable preference shares and optionally convertible cumulative redeemable preference shares, as equity due to vested options to convert the preference shares to equity and long tenure of 18-20 years in case of redemption.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from the parent: JKLC has high operational, managerial and financial integration with its subsidiary, UCWL. The parent has consolidated its position in its key markets of north and western India with the addition of UCWL's assets, and the latter accounts for around 28% of the combined capacity of 16.5 MTPA.

 

UCWL benefits from the parent's managerial support — two directors on UCWL’s board are from the parent's board, including the chairperson who is JKLC’s chairperson and managing director. UCWL also has been using the parent’s stronger and established brand for marketing its product.

 

UCWL receives strong financial and operational support from JKLC. In the past, UCWL has received funds from JKLC in the form of equity and preference shares. The parent also infused around Rs 350 crore during the rights issue completed in July 2023, which increased its shareholding in UCWL to 75%. Major raw materials such as petcoke, coal and fly ash are sourced at the group level, thus benefiting UCWL from JKLC’s scale of operations. Business transactions between UCWL and JKLC pertaining to purchase and sale of cement/clinker indicate rationalisation of the overall cost at the group level.

 

UCWL is likely to remain strategically important to JKLC and will, hence, continue to receive strong managerial, operational and financial support from the parent. The rating of UCWL will remain sensitive to the credit rating of JKLC.

 

• Sustenance of healthy operating performance: UCWL commenced operations with cement grinding capacity of 1.6 MTPA at the end of fiscal 2017 which has subsequently increased to 2.2 MTPA. The company incurred losses in fiscals 2018 and 2019 owing to the initial stabilisation phase following which it significantly scaled up volume and profitability. In the past five years, the company’s effective capacity utilisation has averaged over 85% with absolute Ebitda consistently above Rs 125 crore. The Ebitda is expected to increase over the medium term as the volume ramps up from the newly commissioned integrated cement capacity.

 

The company derives high operational benefit from close proximity of its plant to JKLC’s plant in Sirohi, Rajasthan, as well as the end-user market, thus ensuring low freight cost. Captive limestone mines assure supply of key raw material at low rates. Moreover, the share of captive power has increased to 28 MW post commissioning of the 6 MW waste-heat recovery system (WHRS) plant, enabling the company to meet majority of its power requirement in-house. 

 

Weaknesses:

• Moderate financial risk profile: The company’s net debt to Ebitda ratio reduced to 5.8 times as on March 31, 2024, from 7.9 times a year earlier, primarily as the company utilised the proceeds of the rights issue to fund capex and profitability improved. With the remaining debt expected to be drawn down to fund capex, the net debt to Ebitda ratio is expected to increase. Nevertheless, as volume ramps up from the newly commissioned facility and in the absence of additional capex plans, the ratio is expected to improve over the medium term.

 

Debt protection metrics remained stable with interest coverage at 2.9 times in fiscal 2024, against 2.8 times in the previous fiscal. The ratio is expected to remain moderate over the medium term owing to interest obligation on the term debt of Rs 1,100 crore availed for the brownfield expansion.

 

• Susceptibility to risks relating to input costs, realisations and cyclicality in the cement industry: 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 susceptible to volatility in input prices, including raw material, power, fuel and freight. Increase in coal and pet coke prices in fiscals 2023 and 2022 impacted the profitability of several cement players. Realisations and profitability were also affected by demand, supply, offtake and regional factors. UCWL also remains exposed to fluctuations in fuel and cement prices.

Liquidity: Strong

The liquidity of UCWL derives strength from the overall liquidity of JKLC.

 

At the standalone level, UCWL had cash and liquid surplus of Rs 121 crore as on September 30, 2024.

Fund-based working capital limit of Rs 150 crore at the standalone level was utilised 39% during the six months through November 2024.

 

Accrual is expected to increase over the medium term and will be sufficient to meet the debt obligation of Rs 48 crore and Rs 84 crore during fiscals 2025 and 2026, respectively.

Outlook: Stable

UCWL will continue to benefit from the strong linkages with its parent.

Rating sensitivity factors

Upward factors:

• Upward revision in JKLC’s long-term rating by one notch or more

 

Downward factors:

• Downward revision in JKLC’s long-term rating by one notch or more and/or material change in the shareholding by JKLC or its support philosophy toward UCWL
• Significant deterioration in UCWL’s operating performance

About the Company

UCWL, incorporated in 1993, is an integrated cement player with clinker capacity of 3.0 MTPA and cement grinding capacity of 4.7 MTPA as on November 30, 2024. The plant is located in Udaipur. UCWL also has a 12 MW WHRS and a 16 MW solar power plant.

 

UCWL became a subsidiary of JKLC in fiscal 2014. As on September 30, 2024, the promoter group held 75.00% stake in UCWL.

 

For the first six months of fiscal 2025, UCWL reported profit after tax (PAT) loss of Rs 29 crore and operating income of Rs 619 crore, against Rs 16 crore and Rs 516 crore, respectively, for the corresponding period of fiscal 2024.

About the parent

JKLC is part of the JK group (eastern zone) and was promoted by the late Mr Lala Lakshmipat Singhania and his son, the late Mr Hari Shankar Singhania. The company is presently headed by Mr Bharat Hari Singhania, (Chairman Emeritus) and Smt Vinita Singhania (Chairperson and Managing Director).

 

JKLC had set up its first cement plant in 1982 with 0.5 MTPA capacity, which has grown to total cement capacity to 16.5 MTPA and clinker capacity of 10.0 MTPA as on November 30, 2024 at consolidated level. It has integrated units in Sirohi, Udaipur and Durg; and grinding units in Jhajjar, Cuttack, Kalol and Surat. It has 226 MW of captive power capacity at the consolidated level, which includes thermal power plant of 74 MW, WHR plant of 45 MW, solar power plant of 103 MW along with power purchase agreement for wind power capacity of 4 MW.

 

For the six months ended September 30, 2024, on a consolidated basis, JKLC reported profit after tax (PAT) of Rs 48 crore and operating income of Rs 2,798 crore as against Rs 176 crore and Rs 3,305 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable