Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings to the bank facilities and commercial paper (CP) programme of Shree Cement Limited (SCL).

 

Sales volume increased ~14.7% year-on-year in the domestic market during FY23 as the company ramped up production. However, earnings before interest, tax, depreciation and amortisation (Ebitda) margin contracted to 16.6% from 24.4% due to higher input cost especially power & fuel cost on account of rise in coal/ petcoke prices. The Ebitda margin is expected to improve over the medium term with expected softening in prices of coal/petcoke.

 

SCL had domestic cement capacity of 46.4 million tonne per annum (MTPA) as on March 31, 2023 and power generation capacity of 820.4 MW as on March 31, 2023. The company is continuously adding capacity across various regions. In the northern region, the clinker unit with capacity of 3.8 MTPA and grinding unit with capacity of 3.5 MTPA in Nawalgarh, Rajasthan, is expected to be commissioned by the end of fiscal 2024. The clinker unit of 1.5 MTPA and grinding unit of 3 MTPA in Guntur, Andhra Pradesh is likely to be commissioned by December 2024. The company’s wholly owned subsidiary, Shree Cement East Private Ltd (SCEPL) is also setting up a grinding unit of 3 MTPA in Purulia, West Bengal, which is expected to be commissioned in June this fiscal. SCL is also setting up a solar power plant with capacity of upto 106 MW across various locations.

 

Commencement of operations in these units will further strengthen its market position. The company is likely to undertake capital expenditure (capex) of Rs 2,500-3,000 crore each year to increase the domestic capacity to around 57 MTPA by fiscal 2025. The capex will be funded through surplus in cash accrual and liquidation of investments.

 

The financial risk profile continues to remain robust, as indicated by gearing of 0.15 time as on March 31, 2023, supported by healthy liquid surplus of above Rs 8,000 crore as of March 31, 2023.

 

The ratings continue to reflect the strong business risk profile of SCL, backed by its established market position in northern India, increasing presence in eastern India and entry in the southern and western markets along with cost-efficient operations. The ratings also factor in its strong financial risk profile. These strengths are partially offset by susceptibility to risk of volatility in input cost and realisation, commoditised and cyclical nature of the cement industry. Any substantial, debt-funded capex or acquisition, which may weaken the financial risk profile, will be a key rating sensitivity factor.             

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SCL and its subsidiaries for the rating assessment as the entities have significant business and financial linkages and are under a common management. All these entities are collectively referred to herein as SCL.

 

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 market position

SCL started operations in 1979 at its first greenfield cement plant in Beawar, Rajasthan. Presently, it is the third largest cement company in India with domestic operational capacity of 46.4 MTPA as of March 31, 2023. From 100% of its capacity being in north India until 2014, SCL has diversified geographically over the past few years and now has capacities in the north (52% of total capacity) – Rajasthan, Uttarakhand and Haryana; east (35%) - Bihar, Chhattisgarh Jharkhand and Odisha; south (6%) –Karnataka; west (6%) – Maharashtra and central India (4%) – Uttar Pradesh. The company further diversified its presence in the global market by acquiring Union Cement Company (PJSC) (UCC), a cement company based in Ras-Al-Khaimah, UAE. SCL adopts a multi-brand strategy (comprising brands such as Shree Jung Rodhak, Shree, Bangur, Bangur Power, Roofon and Rockstrong), which allows it to cater to different segments. Increased scale and improved geographical access to eastern India and entry in the western market will further enhance its market position. Additionally, UCC’s plant is in close proximity to the Saqr port in Ras-Al-Khaimah, which provides direct access to export markets in the Arabian Gulf, the Middle East and East Africa. Thus, SCL remains less vulnerable to the vagaries of a single regional market.

 

• Healthy operating profitability, led by cost efficiency

SCL is among the most efficient players in the cement industry. Its operating efficiency arises from sharp focus on operations, low power consumption and majority sale of blended cement, resulting in reduced energy consumption and low raw material per tonne of cement. Also, selling expense is modest because of proximity to end-user markets and use of split-grinding units. The company has total power generation capacity of 820.4 MW. Flexibility in the power plants (to switch to grid or to shut down plant based on merchant tariff) and ability to operate with multiple fuels results in cost-competitive generation in a dynamic scenario. Owing to these factors, SCL has healthy operating profit per tonne of cement in the industry.

 

• Strong financial risk profile, driven by robust cash flow

The financial risk profile should remain strong supported by strong cash accrual of over Rs 3,000 crore expected in fiscal 2024 and liquidity surplus of more than Rs 8,000 crore as on March 31, 2023. Gearing was 0.15 times (based on gross debt) as on March 31, 2023. Major portion of the proposed capex of Rs 5,000- 6,000 crore by fiscal 2025 will be largely funded through cash accrual.

 

Weakness:

• Susceptibility to risks relating to input cost, realisations and cyclicality in the cement industry

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

Liquidity: Superior

Liquidity remains robust, aided by sufficient cash accrual and surplus cash and cash equivalent (including liquid investments) of above Rs 8,000 crore as on March 31, 2023. Cash accrual is projected at over Rs 3,000 crore in fiscal 2024 and at Rs. 3,000- Rs. 4,000 crore over the medium term which will be sufficient to cover the working capital and capex requirements.

 

ESG profile

CRISIL Ratings believes the environment, social and governance (ESG) profile of SCL supports its already strong credit risk profile.

 

The cement sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption as cement manufacturing process is energy intensive 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 health hazards involved.

 

However, SCL has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights of SCL:

• SCL plans to reduce the carbon footprint of its entire production process. It aims to reduce scope-1 emissions by 12.7% and scope-2 emissions by 27.1% by 2030 on base of fiscal 2019.
• In fiscal 2022, the share of renewable energy in the overall energy consumption of the company rose marginally to 48.2% from 47.9% in fiscal 2021, which is the best in the industry. During fiscal 2022, SCL announced plans to set up solar power plants with capacity upto 106 MW.
• SCL was the first company in India to utilise 100% petcoke in its cement manufacturing.
• SCL targets thermal substitution rate upto 5% (current rate 2.41%). The company is currently working on ensuring continuous availability of alternate fuels and is collaborating with other industries for the same. Its alternative fuel rate was 9.8% in fiscal 2022 which has gone up from 6.0% in fiscal 2021
• The company reported loss time injury frequency rate (LTIFR) of 0.09 during fiscal 2022. It adopted a programme ‘Mission Zero Injury’ to eliminate workplace injuries for employees and contractors working in its premises. However, gender diversity remains low for the company as seen in other peers.
• The governance structure is characterised by majority of the board members being independent directors, split in chairman and executive positions, dedicated investor grievance redressal mechanism and extensive disclosures.

 

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

Outlook: Stable

SCL will continue to benefit from its strong market position and geographically diversified presence in India. Healthy revenue growth and profitability will lead to adequate cash accrual and cash surplus, ensuring that the financial risk profile remains strong.

Rating Sensitivity factors

Downward factors

• Inorganic growth plan or larger-than-expected capex in an adverse operating environment
• Decline in operating performance, resulting in the net debt to EBITDA ratio deteriorating to more than 1.0 time on a sustainable basis.

About the Company

SCL was incorporated in 1979 by the Kolkata-based BG Bangur group for setting up a greenfield cement plant in Beawar, with capacity of 0.6 mtpa of portland cement. SCL is the flagship company of the BG Bangur group and had domestic cement capacity of 46.4 mtpa as on March 31, 2023.

 

In July 2018, SCL acquired 97.61% stake in UCC, which then had clinker capacity of 3.3 mtpa and cement capacity of 4.0 mtpa (presently 3.3 mtpa and 4.8 mtpa respectively). UCC deals with a variety of cement including ordinary portland cement, sulphate-resisting cement and oil-well cement.

 

For the year ended March 31, 2023, SCL reported profit after tax (PAT) of Rs 1,269 crore and operating income of Rs 17,852 crore, against Rs 2,337 crore and Rs 14,908 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators of SCL (consolidated; CRISIL Ratings-adjusted numbers):

As on / for the period ended March 31		2022	2021
Revenue	Rs crore	14,908	13476
Profit after tax (PAT)	Rs crore	2337	2290
PAT margin	%	15.7	17.0
Adjusted debt / adjusted networth	Times	0.12	0.14
Interest coverage	Times	18.40	17.28

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Fund-Based Facilities*	NA	NA	NA	1100	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit**	NA	NA	NA	1200	NA	CRISIL A1+
NA	Commercial Paper	NA	NA	7-365 days	500	Simple	CRISIL A1+

*Fund-based limit consists of cash credit/working capital demand loan/buyer's credit/short-term loan
**Non-fund-based limit comprises letter of credit and bank guarantee/standby letter of credit/letter of undertaking

Annexure – List of entities consolidated

S. No.	Name of entity	Extent of consolidation	Rationale for consolidation
1	Raipur Handling and Infrastructure Pvt Ltd	Full	Significant business and financial linkages and are under a common management
2	Shree Enterprises Management Ltd	Full
3	Shree Global FZE	Full
4	Union Cement Norcem Company Ltd LLC	Full
5	Shree International Holding Ltd	Full
6	UCC	Full
7	Shree Cement North Private Ltd (with effect from June 11, 2022)	Full
8	SCEPL (with effect from June 11, 2022)	Full
9	Shree Cement South Private Limited (with effect from June 11, 2022)	Full