| Udaipur Cement Works Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA/Stable/CRISIL A1+'; rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the enhanced bank facilities of Udaipur Cement Works Limited (UCWL)
The ratings continue to reflect the strategic importance of UCWL to JK Lakshmi Cement Ltd (JKLC; ‘CRISIL AA/Stable/CRISIL A1+') and strong support it receives from JKLC. The ratings also factor in UCWL's turnaround in operating performance and high financial flexibility. These strengths are partially offset by average debt protection metrics, large debt-funded capital expenditure (capex) and susceptibility to input costs and cyclicality in the cement industry.
Considering external cement sales volume, operating income grew around 17.7% during fiscal 2023, driven by higher sales volume (up by 10.2%), and realisation (up by 7.2%). Profitability, as measured by earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne, moderated in fiscal 2023 (around Rs 657 in fiscal 2023, as against Rs 802 in fiscal 2022) owing to rise in input costs. In the first half of fiscal 2024, operating income increased by 3.6% year-on-year owing to 3.9% rise in volume while realizations remained flat. Ebitda per tonne also remained largely flat at Rs 636 in first half of fiscal 2024 as against Rs 643 in the first half of fiscal 2023.
In fiscal 2024, volume is expected to grow at a healthy pace due to strong expected demand from the infrastructure segment. Ebitda per ton is also expected to improve driven by increase in realisations and reduction in input costs.
The financial risk profile moderated in fiscal 2023, as expected, with net debt to Ebitda of 7.9 times against 3.7 times in fiscal 2022, as UCWL raised debt to fund capex along with subdued profitability owing to high power and fuel cost. The ratio is expected to remain at similar levels during fiscal 2024 and thereafter improve over the medium term as contribution to revenue and profitability from new unit would meaningfully accrue from fiscal 2025 onwards. |
Analytical Approach CRISIL Ratings has applied its criteria for notching up ratings based on parent support. Outstanding preference shares, both cumulative redeemable preference shares and optionally convertible cumulative redeemable preference shares, have been treated 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:
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 region with the addition of UCWL's assets, as the latter accounts for around 16% of the combined capacity of 14.0 million tonne per annum (MTPA).
UCWL benefits from the parent's managerial support as two directors on the company’s Board are from the parent's Board, including the chairman who is JKLC’s vice chairman and managing director. The company also has been using the parent’s stronger and established brand for marketing of its product.
UCWL also 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. Also, JKLC has extended a corporate guarantee for the entire outstanding debt of UCWL (except loans under the Emergency Credit Line Guarantee Scheme and working capital facilities) and intends to extend the same for future borrowing. It also infused around Rs 350 crores of funds during the rights issue completed in July 2023, which increased its shareholding in UCWL to 75%. Sourcing of major raw materials such as petcoke, coal and fly ash are done 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 thus will continue to receive strong managerial, operational and financial support from the parent. However, the rating of UCWL will remain sensitive to the credit rating of JKLC.
UCWL commenced operations with cement capacity of 1.6 MTPA at the end of fiscal 2017. This project was funded through debt of Rs 525 crore, promoter contribution of Rs 215 crore and balance through internal accrual. The company reported losses in fiscals 2018 and 2019 owing to the initial stabilisation phase following which it significantly scaled up volume and profitability.
The company’s capacity utilization has averaged over 90% and absolute Ebitda consistently above Rs 125 crore over the past three years. The Ebitda is expected to improve from fiscal 2024 with improvement in realisations and moderation in input costs. Additionally, with the capacity addition and ramp up in operations from fiscal 2025, Ebitda is expected to improve further over the medium term.
Weaknesses:
JKLC announced brownfield capex to be undertaken in UCWL for setting up 1.5 MTPA clinker capacity, 2.5 MTPA cement grinding capacity, along with waste heat recovery system (WHRS) plant and railway sidings. The overall project cost is estimated at Rs 1,650 crore and is to be funded through debt of Rs 1,100 crore (to be guaranteed by JKLC), rights issue carried out in UCWL in July 2023 of Rs 450 crore and internal accrual of Rs 100 crore. The plant is expected to be commissioned ahead of its scheduled commercial operations date of September 2024. The clinker unit of 1.5 MTPA commenced operations in October 2023. Given the size of the project, the company is exposed to execution risks and ability to ramp up new capacity. Hence, timely commencement of commercial operations, within budgeted cost, will remain a key monitorable. However, JKLC’s past track record of successfully completing various capacity addition projects provides comfort.
The company has availed debt to fund capex, which led to an increase in net debt to Ebitda ratio to 7.9 times as on March 31, 2023, against 3.7 times a year earlier. Interest coverage ratio reduced to 2.8 times as on March 31, 2023 against 3.1 times as on March 31, 2022. Debt protection metrics, however, are expected to remain healthy going forward. Net debt to ebitda is expected to improve to around 3 times by fiscal 2026, with an increase in Ebitda due to incremental accruals from additional capacity.
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 fiscal 2023 and 2022 impacted the profitability of several cement players. Realisations and profitability were also affected by demand, supply, offtake and regional factors. The company also remains exposed to fluctuations in fuel and cement prices. |
Liquidity: Strong The liquidity of UCWL derives strength from the overall liquidity of JKLC. Cash and liquid surplus stood at Rs 4 crore as on March 31, 2023. The parent is undertaking capex of around Rs 1,650 crore over fiscals 2022 to 2025 in UCWL, which is expected to be financed through debt of Rs 1,100 crore, rights issue in UCWL of Rs. 450 crore and internal accrual of Rs 100 crore. Bank lines are expected to comfortably meet working capital requirement. |
Outlook: Stable UCWL will continue to benefit from the strong linkages with its parent despite moderation in the standalone credit risk profile. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company UCWL, incorporated in 1993, is an integrated cement player with clinker capacity of 3.0 MTPA and cement grinding capacity of 2.2 MTPA as on October 31, 2023. The plant is located in Udaipur (Rajasthan). UCWL also has a 7-MW WHRS and a 16-MW solar power plant thus meeting 48% of the power requirement from renewable sources.
UCWL became a subsidiary of JKLC in fiscal 2014. As on September 30, 2023, JKLC held 75.00% stake in UCWL.
For the first six months of fiscal 2024, UCWL reported profit after tax (PAT) of Rs 16.4 crore and operating income of Rs 515.6 crore, against Rs 15.8 crore and Rs. 498.2 crore, respectively, for the corresponding period of fiscal 2023. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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