By Khushbu Lakhotia

India Ratings and Research (Ind-Ra) has upgraded Penna Cement Industries Limited’s (PCIL) Long-Term Issuer Rating to ‘IND A+’ from ‘IND A’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Fund-based working capital limits

-

-

-

-

INR2,350

IND A+/Stable/IND A1+

Upgraded

Non-fund-based working capital limits

-

-

-

-

INR2,150

IND A1+

Upgraded

Term loan

-

-

-

September 2027

INR12,700

IND A+/Stable

Upgraded


ANALYTICAL APPROACH: Ind-Ra continues to take a consolidated view of PCIL and its subsidiaries Pioneer Cement Industries Limited and, Marwar Cement Limited and Singha Cement (Pvt) Limited to arrive at the ratings. The subsidiaries would operate in the same line of business as PCIL and be strategic in nature, as PCIL is planning to expand in northern India and Sri Lanka under these subsidiaries. The financial metrics of the standalone and consolidated profiles are the same for FY20, as there are no material operations carried out in these subsidiaries. Further, Ind-Ra has also factored shortfall support to group entities -  Pioneer Genco Limited (IND BBB-/Stable), Pioneer Power Corporation Limited (IND BBB-/Stable) and Pioneer Power Limited (IND BBB-/Stable) as required.

The upgrade reflects a strong improvement in PCIL’s operating performance during 9MFY21, resulting in an improvement in EBITDA and credit metrics.

KEY RATING DRIVERS

Significant Improvement in Operating Performance: Despite being impacted by COVID-19-led disruptions in 1QFY21, PCIL’s operating performance improved significantly during 9MFY21 as EBITDA rose 31% yoy to INR3.2 billion in 9MFY21 despite a 21% yoy decline in EBITDA to INR0.8 billion in 1QFY21. The improvement was led by an increase in EBITDA/mt to INR887 in 9MFY21 (9MFY20: INR640), led by strong realisations and cost reduction. However, while realisations moderated over 2QFY21-3QFY21, an increase in volumes and cost optimisation enabled the company to achieve an EBITDA/metric tonne (mt) of INR900 in 3QFY21.  PCIL is on course to achieve a growth of around 40% in the total EBITDA over the levels of INR3.3 billion achieved in FY20, which is also significantly above Ind-Ra's earlier expectation. While the cost tailwinds have started to dissipate with an increase in prices of petcoke, coal and diesel, Ind-Ra expects the cost-saving initiatives, including the commissioning of PCIL's 15MW waste heat recovery plant in March 2021, to restrict the moderation in profitability in FY22.

After having been nearly flat in 2QFY21, PCIL's cement sales grew 24% yoy to 1.6 million tonnes (mnt) in 3QFY21 , and the growth is likely to have been at similar levels in 4QFY21, due to strong demand momentum, with recovery in infra-led non-trade demand. The strong recovery in 3QFY21 restricted the demand decline to 5% in 9MFY21. Overall, the company is likely to witness marginal growth on a yoy basis in FY21on a weak FY20 base that was impacted by the nation-wide lockdown and weak offtake in PCIL's home state Andhra Pradesh, against to Ind-Ra’s earlier expectations of a decline.

Divestment Boosts Liquidity and Credit Profile: The strong operating performance resulted in the company's 3Q-annualised net leverage improving to 2.6x at end-December 2020 (FY20: 4.4x). Furthermore, PCIL divested its 50% stake in Parasakti Cement Industries Limited (IND BBB+/RWE) in March 2021 for a total consideration of INR2.5 billion, which helped improve the company's credit metrics as well as liquidity profile, without impacting its recurring cash flows. Ind-Ra expects PCIL's net leverage to fall below 2.5x in FY22, led by a robust operating performance and reduction in debt, as the company has completed the bulk of its expansionary capex, which had led to the elevated metrics till FY20.

Over FY16-FY21, PCIL spent around INR20 billion to expand its cement and clinker and capacities and set up a coastal belt sales network to boost its geographical presence, coupled with capex towards efficiency improvements by investing towards in-house power plants and shipping vessels to smoothen coastal route transition. While the clinker capacity expansion (to 7.8mnt from 5.3mnt) was completed in FY21, the cement capacity has been increased to 10mnt (from 7mnt) and the balance 2mnt is likely to be commissioned in FY22. The capex put pressure on its credit metrics, with the net leverage steadily rising to 4.7x in FY19 (FY16: 1.6x), before improving  in FY21. The company has completed a major portion of the capex. The balance capex of INR1.5 billion -1.75 billion (largely towards 2mnt of grinding capacity at Krishnapatnam) will be incurred in FY22; this coupled with a robust operating performance will lead to further de-leveraging. The company does not intend to undertake any other debt-funded capex in the near term.

Targeting New Markets through Coastal Lines to Reduce South Concentration: The company has strategically set up a grinding unit near the Krishnapatnam port in Andhra Pradesh to cater to the nearby catchment areas as well as other coastal regions of different states. For this, the company has purchased a vessel with a capacity of 25,000 metric tonnes to carry bulk cement and transport it to the packing units.

Furthermore, FY21 onwards, PCIL’s business profile has benefited from the full commissioning its Krishnapatnam and Pune facilities along with the packing units set up in the coastal belt of south and east India in FY20, which will reduce the revenue concentration risk faced by the company as it ramps up volumes in FY22. The Pune unit is strategic in nature on account of the proximity of the plant to key western markets, which would reduce the overall operational costs and thus aid PCIL’s profitability. The Krishnapatnam unit enables PCIL to ship bulk cement and capture farther markets that yield higher realisations. To enhance its geographical presence through coastal lines, the company has set up packing units in Cochin (Kerala), Gopalpur (Odisha) and Colombo (Sri Lanka); the unit in Karaikal (Tamil Nadu) was  commissioned on 31 March 2021, while the Kolkata unit would be commissioned by 1QFY22. The company has also started gaining volumes from the Sri Lankan markets through its recently acquired subsidiary. The company has reduced its geographical concentration, with the share of sales in South India falling to around 75% in 9MFY21 (FY18: 85%); the balance was contributed by  Maharashtra, Odisha, and Colombo. Despite the demand issues in its home state of Andhra Pradesh in FY20 (due to elections and the subsequent slowdown in government projects coupled with the COVID-19-led lockdown), PCIL’s sales volume decreased only by 1.5% yoy to 5.2mnt in FY20.

Liquidity Indicator - Adequate: PCIL's liquidity improved in March 2021, as the company received an inflow of INR2.5 billion from the sale of its stake in Parasakti to the latter's promoters. The proceeds will mostly be used to fund its capex and working capital requirements, considering the likely increase in sales. Furthermore, the liquidity is supported by the company's ability to generate positive cash flow from operations of over INR1 billion per year over FY14-FY20 (except FY17: negative INR77 million); this is likely to continue over the near-to-medium term.  The free cash flow could turn marginally negative in FY21 due to the undertaking of capex of about INR2.5 billion during the pandemic-affected year, but it is likely to rebound in FY22 owing to a reduction in capex and increase in cash flow from operations.  PCIL had undrawn sanctions of around INR1.2 billion at end-March 2021; however, the management has indicated that the need for additional funding has reduced owing to the receipt of the divestment proceeds, and hence, the undrawn loans will be availed only if needed. PCIL’s average use of the fund-based and non-fund-based limits was 85%-90% for the 12 months ended February 2021, indicating limited cushion.

Group Entities Have Sufficient Near-term Liquidity, but Support Remains Key Monitorable: PCIL has provided a letter of comfort confirming that support will be provided to three of its group entities -  Pioneer Genco Limited, Pioneer Power Corporation Limited and Pioneer Power Limited - to avoid any payment default. According to the loan documents of PCIL and these entities, any default in the three entities will be construed as a default of PCIL. Ind-Ra believes the companies are likely to have sufficient liquidity over the near-to-medium term (next couple of years) to meet their debt obligations without any support from PCIL; after this period, these companies might require support unless the debt is reduced over the next one year as planned. 

Furthermore, the management pledged additional shares of PCIL in 4QFY21 in lieu of the initial public offering and the subsequent prepayment-related covenant in the loan agreement of the power companies, which stated that the non-occurrence of initial public offering before 31 March 2020 was to be considered as an event of default. While the initial public offering eventually was shifted due to market conditions and COVID-19-related issues, the management exercised the option of pledging the additional shares of PCIL as an alternative as per the loan documents, giving them more flexibility in terms of the prepayment timeline.

Susceptibility to Volatility in Input and Cement Prices: PCIL remains exposed to fluctuations in fuel prices in addition to the risks of volatile cement prices, given the oversupply situation in southern India.


RATING SENSITIVITIES

Positive: An improvement in the operating performance coupled with a higher financial flexibility and simplified group structure, along with the net leverage reducing below 2x, on a sustained basis, could lead to a rating upgrade

Negative: Lower-than-expected EBITDA generation and/or higher capex or support to group companies, leading to the net leverage sustaining above 2.5x, could lead to a negative rating action.


COMPANY PROFILE

Incorporated in 1991, PCIL manufactures cements at its four integrated facilities and has two grinding units across Andhra Pradesh, Telangana and Maharashtra. The facilities have an aggregate capacity of 10mtpa. It has a 77MW coal-based captive power generation plant and a 32MW waste heat recovery system.

CONSOLIDATED FINANCIAL SUMMARY 

Particulars (INR billion)

9MFY21

FY20

FY19

Revenue

16,060

21,697

21,640

Operating EBITDA

3,211

3,336

3,165

Gross interest expenses

1,710

1,874

1,395

Debt

14,580

14,703

15,526

Source: PCIL, Ind-Ra

 

 

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (million)

Rating

18 December 2020

9 March 2020

26 December 2018

16 March 2018

Issuer rating

Long-term

-

IND A+/Stable

IND A/Positive

IND A/RWN

IND AA-/Negative

IND AA-/Negative

Fund-based working capital limits

Long-term/Short-term

INR2,350

IND A+/Stable/ IND A1+

IND A/Positive/ IND A1

IND A/RWN/ IND A1/RWN

IND AA-/Negative/ IND A1+

IND AA-/Negative/IND A1+

Non-fund-based working capital limits

Short-term

INR2,150

IND A1+

IND A1

IND A1/RWN

IND A1+

IND A1+

Term loan

Long-term

INR12,700

IND A+/Stable

IND A/Positive

IND A/RWN

IND AA-/Negative

IND AA-/Negative



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Term loan

Low

Fund-based limits

Low

Non-fund-based limits

Low

 

For details on the complexity levels 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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Analyst Names

  • Primary Analyst

    Khushbu Lakhotia

    Associate Director
    India Ratings and Research Pvt Ltd Room No. 1201, 12th Floor Om Towers 32, Chowringhee Road Kolkata 700 071
    +91 33 40302508

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121