By Karthikeyan Thangarajan

India Ratings and Research (Ind-Ra) has revised Penna Cement Industries Limited’s (PCIL) Outlook to Negative from Stable while affirming its Long-Term Issuer Rating at ‘IND AA-’. The instrument-wise rating actions are given below:

Instrument Type

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Non-convertible debentures (NCDs)

INE862I07015

14 June 2014

12.25%

14 June 2019

INR350

IND AA-/Negative

Affirmed

Term loans*

-

-

-

June 2020 to March 2027

INR9,910

(increased  from INR6,992.1)

IND AA-/Negative

Affirmed

Fund-based working capital limits

-

-

-

-

INR1,700

IND AA-/Negative/IND A1+

Affirmed

Non-fund-based working capital limits

-

-

-

-

INR1,800

IND A1+

Affirmed

Term loan*

-

-

-

June 2020 to March 2027

INR2,790

 

IND AA-/Negative

Assigned

Commercial paper (CP) programme

-

-

-

-

INR500

IND A1+

Affirmed

* The final rating has been assigned to the term loan following the receipt of loan documents by Ind-Ra.

The proceeds of the NCD issue were used for general corporate purposes and capex incurred by the company during FY15. The CP is for working capital and any other short-term purposes. The tenor may vary from seven to 90 days.

KEY RATING DRIVERS

Risk of Delayed Deleveraging: The Negative Outlook reflects delays in ongoing capex implementation and higher than expected debt funded capex, which has increased the risk of PCIL’s net adjusted leverage (net adjusted debt/ operating EBITDA) staying elevated for an extended period. The Pune grinding facility, which was earlier expected to commence production from April 2017, has not commenced operations till date, due to delays in completion of railway sidings. In case of the Krishnapatnam project, full financial closure was achieved with a delay of more than a year in April 2017. Further, the company has also taken up additional debt-funded capex which will increase debt by INR3.2 billion in FY18. Ind-Ra expects the debt levels to peak at INR15 billion in FY19 as against INR11.5 billion in FY18.

Ind-Ra had earlier expected a sustained deleveraging to below 2x from FY19 with 1.6 million tonnes incremental volume flowing in from the Pune and Krishnapatnam facilities. The new facilities are now expected to start operations by March 2018. However, any delays in EBITDA generation from these projects may lead to net adjusted leverage (FY17: 2.5x; FY16: 1.6x) remaining around 3x in FY19, and impact the ratings. Ind-Ra will closely monitor the progress of capex implementation and review the ratings.

Volume Growth, EBITDA/Tonne Improves: The affirmation reflects better than expected growth in volumes and EBITDA/tonne. PCIL’s volume grew 10% yoy to 3.9 million tonnes during FY17 supported by the double digit growth in Andhra Pradesh and Telangana. The company’s per tonne realisation declined 4% yoy during FY17, although was better than the 9% yoy decline seen during 1HFY17. Apart from lower realisation, a sudden increase in imported coal prices in FY17 resulted in lower EBITDA margins (FY17: 19.7%; FY16: 29%). Realisation continued to improve in 1QFY18 (7% from FY17 average). Softening of imported coal prices and a 4% yoy volume growth in 1QFY18 supported improvement in EBITDA/tonne to INR968 (FY17: INR940) and EBITDA margins to 21.3%. Ind-Ra expects the EBITDA/tonne to sustain at the current levels during FY18.

Comfortable Liquidity: PCIL has consistently generated positive cash flow from operations (FY17: INR1.07 billion; FY16: INR4.6 billion). The two-year moratorium available to the company post refinancing of its term loans in 1QFY18 is likely to enable it to fund the internal accrual portion of the fresh capex without much strain on its liquidity. The total long-term loan repayment obligation including sales tax deferment loan declined to INR714 million over FY18-FY19 as against INR3.2 billion earlier. However, the ongoing large capex is likely to keep free cash flow negative. Further, the average peak utilisation of company’s cash credit account remained at about 80% in the 12 months ending August 2017.

Expected Improvement in Business Risk Profile: The ratings continue to reflect the expected improvement in PCIL’s business risk profile upon the completion of its current capex. The geographical concentration levels are likely to ease with the new capacities coming on stream. The Pune grinding facility is likely to increase the proportion of sales to Maharashtra in FY19, where the average cement realisation for the company was about 20% below Telangana and Andhra Pradesh during FY17. While certain benefits could accrue to PCIL by moving closer to this target market, the ability of the company to offset the impact of lower realisations will remain a key to sustain EBITDA margins. The Krishnapatnam project is likely to give PCIL access to new markets and aid in higher utilisation of existing clinker facilities, thus rendering the company more resilient to volatility in realisations. 


RATING SENSITIVITIES

Outlook Revision to Stable: Timely completion of the ongoing capex leading to better EBITDA generation and resulting in the net adjusted leverage improving to below 2x on a sustained basis could result in the Outlook being revised back to Stable.

Negative: Delays in completion of ongoing capex resulting in lower than expected volume contribution from the Pune and Krishnapatnam facilities during FY19 and/or decline in the operating EBITDA margins leading to a change in the expectation of a sustained improvement in net adjusted leverage to below 2x could lead to a rating downgrade.


COMPANY PROFILE

Incorporated in 1991, PCIL is engaged cement manufacturing. The company has operational plants at four locations across Andhra Pradesh and Telangana with aggregate clinker capacity of 5.2MTPA and grinding capacity of 7MTPA. It has a 77MW coal-based captive power generation plant and a 16MW waste heat recovery system. PCIL sells cement under the brand name Penna and has about 5% share in the southern market. It derives more than 80% of revenue from Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Kerala.

Apart from the Pune and Krishnapatnam grinding facilities, it has now taken up additional capex to acquire three vessels for transport of cement at an estimated cost of INR3.25 billion, of which about INR2.5 billion will be funded by debt. PCIL has also commenced INR5.75 billion capex to enhance its clinker capacity, which is likely to be funded by INR0.8 billion debt.

 FINANCIAL SUMMARY

Particulars

FY17

FY16

Revenue (INR billion)

18.8

18.6

EBITDA (INR billion)

3.7

5.2

EBITDA margins (%)

19.7

28.0

Interest coverage (x)

6.5

8.1

Source: PCIL

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

16 February 2017

16 March 2016

Issuer rating

Long term

-

IND AA-/Negative

IND AA-/Stable

IND AA-/Stable

NCDs

Long term

INR350

IND AA-/Negative

IND AA-/Stable

-

Term loans

Long term

INR12,700

IND AA-/Negative

IND AA-/Stable

IND AA-/Stable

Fund-based working capital limits

Long term/Short term

INR1,700

IND AA-/Negative/IND A1+

IND AA-/Stable/ IND A1+

IND AA-/Stable/ IND A1+

Non-fund-based working capital limits

Short term

INR1,800

IND A1+

IND A1+

IND A1+

CP

Short term

INR500

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Karthikeyan Thangarajan

    Associate Director
    India Ratings and Research Pvt Ltd 4th Floor, D South, TIDEL Park No 4, Rajiv Gandhi Salai, Taramani Chennai 600 113
    +91 44 43401712

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121