Analytical Approach: Ind-Ra continues to take a standalone approach to arrive at GIL’s rating due to limited operational and legal linkages with its major key subsidiaries.
The rating reflects GIL’s strong business profile
with a dominant market share in its key business operations, substantial backward
integration and diversified business operations. The company’s financial
profile is supported by low balance sheet leverage and significant non-current
quoted investment. The rating also benefits from GIL’s strong financial
flexibility, given it is the holding company of UltraTech Cement Limited (UCL; ‘IND AAA’/Stable).
KEY RATING DRIVERS
Strong Business Profile: GIL has leadership positions in the viscose staple fibre (VSF) and chemical (chlor-alkali) businesses in India. The backward integration of GIL’s VSF business, along with captive pulp capacity (about 50%) and caustic soda requirement (100%), which together form about 50% of the cost of production is beneficial to the company. In FY18, the VSF and chemical businesses contributed 55% and 42% to EBITDA, respectively.
Robust Credit Metrics: GIL is likely to sustain its strong credit metrics over the next 12-18 months. Ind-Ra expects its EBITDA interest coverage (EBITDA/gross interest) ratio, which was 20.0x in 9MFY19 and 24.0x in FY18, to decline in FY20 and FY21, though remain robust at 15.0x-20.0x. In addition, the agency expects the leverage, which was 0.1x (annualised) in 9MFY19 and 0.3x in FY18, to inch up but remain below 1.5x in FY20 and FY21 due to a substantial capex programme and non-current investments. The moderation in the credit metrics is on back of likely correction in EBITDA margin in FY20 on account of easing global demand-supply equation and softening in realisations for both VSF and caustic soda.
GIL has an ongoing capex, including normal capex, of INR76 billion on brownfield expansions in the VSF and chemical businesses. The capex commenced in FY19 and is scheduled to be completed by FYE21. The company incurred an INR12,400 million capex in 9MFY19 against the planned capex of INR21,660 million for FY19.
Investment Book and Financial Flexibility: GIL holds a 60.2% stake in UCL, the largest manufacturer of grey cement, ready-mix concrete and white cement in India. UCL accounts for 77% of attributable market value of the non-current investments in GIL. Hence, UCL is a significant investment for the parent and supports its ratings. Given GIL is a part of the Aditya Birla Group and a listed entity, it has a strong financial flexibility as it has access to the debt and equity markets. Moreover, GIL holds equity stakes in Aditya Birla Capital Limited (ABCL), Aditya Birla Fashion Retail Limited, Hindalco Limited and Vodafone Idea Limited (VIL; ‘IND A+’/RWN), which, along with UCL, had a collective attributed market capitalisation of INR860 billion at end-February 2019.
GIL has received a tax demand of INR58 billion with regard to its merger with ABNL, implying accrual of dividends in the hands of GIL and a liability in the form of a dividend distribution tax. Ind-Ra has not factored in any cash flow impact from this dispute as the issue is pending in the courts. Hence, the rating action will be only reactive.
Increase in Non-Current Investments: GIL’s management has articulated that it will continue to maintain equity stakes in VIL and ABCL, which may require growth capital. As such, the agency has stressed GIL’s cash flows to account for outflows to fund capital calls to the extent of its equity holdings. Ind-Ra notes the announced INR250 billion rights issue by VIL to require about INR29 billion outflows from GIL in FY20.
Adequate Liquidity: GIL has a strong liquidity position with a net cash positon (net debt-cash) of INR1 billion (including current investment) at 3QFYE19. Its fund-based limits working capital of INR24 billion was sparingly used in the 12 months ended January 2019, as per the management. At end-February 2019, it had unutilised and available working capital limits of close to INR24 billion. GIL’s free cash flow is likely to turn negative in FY20-FY21 in view of the capex programme of INR76 billion. The working capital cycle was 73 days in FY18 (FY17: 86 days) and is likely to be at a similar level in FY19 and FY20. GIL has a limited debt maturity of INR3.9 billion in FY19 and of INR4 billion in FY20. GIL’s generates a strong operating cash flow margin (average for FY15-FY18: 19%).
Cyclicality: GIL is
exposed to cyclicality in earnings due to its exposure to the chemical and VSF
businesses. Its EBITDA margin (FY18: 19.51%; FY17: 20.8%) is susceptible to
volatility in input prices and the prices of competing fibres, including cotton
COMPLEXITY LEVEL OF INSTRUMENTS
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