PENNA CEMENT INDUSTRIES LIMITED

Transcription

1 Ratings PENNA CEMENT INDUSTRIES LIMITED Facilities Amount (Rs. crore) Ratings 1 Remarks Proposed Non-Convertible Debenture 150 CARE A+ [Single A Plus] Assigned Total Facilities 150 Rating Rationale The assigned rating to the proposed NCD issue of Penna Cement Industries Limited (PCIL) primarily takes into account the improved financial performance in terms of growth in the total operating income in FY13 (refers to the period April 1 to March 31) and strong capital structure. The ratings continue to draw strength from PCIL s established track record, experienced promoters, location advantage of the manufacturing facilities, firm raw material sourcing arrangement, improvement in capacity utilization and established presence in the southern region with a strong brand recognition. The ratings are, however, constrained by the high exposure to the group/subsidiary companies, volatile input & fuel prices and moderate industry outlook with unfavorable demand supply scenario. The ability of the company to diversify to new markets and maintain the financial risk profile without any further exposure to the group companies are the key rating sensitivities. Background Penna Cement Industries Limited (PCIL), incorporated in 1991, belongs to the Hyderabad-based Penna Group, which is an established industrial house of south India having a presence in cement, power generation, alumina manufacturing and construction. PCIL is engaged in the manufacturing of Ordinary Portland Cement (OPC) [53 grade and 43 grade] and Pozzolana Portland cement (PPC) with the product mix of OPC: PPC in the ratio of about 30:70. PCIL also manufactures Portland Slag Cement (PSC). PCIL has a combined installed capacity of 7 million tones p.a. at its existing manufacturing facilities, spread across four locations in Andhra Pradesh and also has a coal based captive power plant with a capacity of 77 MW. PCIL executed Fuel supply agreement (FSA) with Singareni Collieries Company Limited for the supply of coal and entered into short term Power Purchase Agreement (PPA) with Reliance Energy Trading Limited for 20MW at net tariff of Rs 5.43 per unit for a period of one year ending May 29, PCIL sells its cement under the brand name Penna and has presence in all the states of Southern India as well as Maharashtra and Orissa. PCIL with the proceeds from the proposed NCD is planning to set-up 16.30MW Waste Heat Recovery Plants (WHRP) at two of its cement manufacturing units. Total expected cost outlay for WHRP will be around Rs.145 crore funded through debt of Rs.100 crore of debt and the remaining Rs.45 crore through internal accruals. Remaining Rs.50 crore will be used for replacing the existing machinery at few plants and for augmenting the short-term needs of the company. Credit Risk Assessment Improvement in operating income with better debt coverage indicators The total operating income improved from Rs.1,734 crore in FY12 to Rs.1,944 crore in FY13 on account of an increase in volumes which increased from 3.87 MTPA in FY12 to 4.32 MTPA in FY13 and due to better Average Gross Sales Price Realizations (AGSPR), which increased marginally from Rs.5,137 per MT in FY12 to Rs.5,150 per MT in FY13. The PBILDT margins declined from 21.86% in FY12 to 17.68% in FY13 on account of an increase in the raw material costs and high power costs. In FY13, PCIL paid a one-time fuel surcharge adjustment of Rs.52 crore which impacted the margins by 2.60%. However, the margins have improved in H1FY14 (UA) to 18.53% on account of an increase in AGSPR to Rs.5,350 per MT in H1FY14 and also due to low power costs on account of high usage of captive power. PCIL s debt to equity ratio has improved from 0.32x as on March 31, 2012 to 0.31x as on March 31, Interest coverage ratio has improved from 5.12 times to 5.52 times in FY13. The overall gearing was comfortable at 0.40x as on March 31, The adjusted gearing, adjusting net-worth for loans & 1 Complete definitions of the ratings assigned are available at and other CARE publications 1

2 advances to the group company, Anrak Aluminnium Limited, of Rs.183 crore was 0.46x as on March 31, 2013, which is also at a comfortable level. Experienced promoters and long track record of the company PCIL, the flagship company of the Penna Group was promoted by Mr P Prathap Reddy. Penna group is an established industrial house of south India having an experience of more than two decades. The group has diversified activities with a presence in cement, power generation and construction & infrastructure development. PCIL was promoted in 1991 with an initial capacity of 0.2 Million Tons Per Annum (MTPA) with its cement plant at Tadipatri, Andhra Pradesh. Over the years, the company expanded its cement capacity significantly and diversified its market presence to the entire southern region. Location advantage of plants Location advantage has an important bearing on the profitability of the company, considering cement is a freight intensive industry. With an increase in diesel prices, the freight cost is expected to increase which shall further put pressure on the profitability margins of the company. The presence of manufacturing units near raw material sources and end markets helps in the supply chain efficiency and maintain margins. The freight costs as a percentage of the total cost of sales has decreased marginally from 24% in FY12 to 23% in FY13. Improvement in capacity utilization despite subdued demand in the Andhra region The southern region of India is the highest cement producing and consuming region of the country. Due to high capacity addition of 57 mtpa during the period FY08-FY13, the supply has outpaced the demand in the region which led to a fall in capacity utilizations over a period. Utilizations in the southern region dropped from 80% in FY08 to 60% in FY13. Due to better demand from the other three states (Tamil Nadu, Karnataka and Kerala), PCIL capacity utilization improved in FY13 to 63% from 57% in FY12, despite the subdued demand in Andhra Pradesh, one of the major markets for PCIL. The revenue concentration from Andhra Pradesh has decreased from 51% of total revenue in FY12 to 46% in FY13 with an improvement in revenue concentration from the other three states. Adequate availability of raw material and fuel sourcing agreement PCIL has six mines in Anantapur, Kurnool and Nalgonda districts of Andhra Pradesh. The company has a total mining area of 1,105 hectares having reserves of about 410 million tonnes, which is adequate to meet the requirements of the existing plant capacity for the next several decades. The cement industry being an energy intensive industry, PCIL has a captive power plant of 77MW in Ganeshpahad, Nalgonda district of Andhra Pradesh. PCIL has a fuel supply agreement with Singareni Collieries Company Limited (SCCL) for around 599,500 MT per annum. Since SCCL supplies around 75% of the contracted capacity, PCIL also has to rely on imported coal. High usage of captive power will lead to low power costs PCIL has a coal-based captive power generation plant with a capacity of 77 MW which was commissioned on March 15, PCIL initial entered into Power Purchase Agreement (PPA) PCIL s PPA with Reliance Energy Trading Limited (RETL) for the supply of 45 MW at a tariff of Rs.4.96 per Kwh for a period of three years period ending on May 30, Due to the high power costs in the Andhra Region, PCIL has entered into a short term Power Purchase Agreement (PPA) with Reliance Energy Trading Limited only for 20 MW at a net tariff of Rs.5.43 per KWh and use the remaining power for captive purpose which will decrease the power costs. Strong brand recognition and strong presence in the entire southern region PCIL sells its cement under the brand name of Penna and has a strong presence in all four southern states of India. PCIL has a presence in Maharashtra as well as Orissa. It is the third largest player (in terms of cement dispatched) in the AP region with a market share of around about 10% in the last two years. The revenue concentration from Andhra Pradesh has decreased from 51% in FY12 to 46% in FY13. The revenue concentration from other three southern states has increased from 40% in FY12 to 49% in FY13. The revenue concentration from different states of south region are 23% (17% in FY12) in FY13 for Tamilnadu, 17.3% (16.9%) in FY13 for Karnataka and 7.85% (5.79%) in FY13 for Kerala. The revenue contribution from Maharashtra and other states is around 4.6% in FY13. The ability of the company to penetrate to new markets will be critical for improving the turnovers and profitability margins. 2

3 High exposure to the group/subsidiary companies PCIL s exposure to the group/associate companies has increased in the financial year FY13. The exposure to group companies as a percentage of the net-worth has increased from 48% of net-worth in FY12 to 55% of net-worth in FY13. The total group exposure as on March 31, 2013 was at Rs crore (against Rs crore as on March 31, 2012) in the form of investments of Rs crore (FY12 Rs crore), corporate guarantee Rs crore (FY12 Rs crore), receivables Rs.5.29 crore (FY12 Rs.7.05 crore) and loans & advances Rs crore (FY12 - Rs crore). PCIL s exposure to the group companies increased mainly on account of an increase in investments and loans & advances. The increase in investments and loans & advances majorly towards one associated company, Anrak Aluminnium Limited (Rated CARE BB+), which has set-up an alumina refinery of 1.5 mtpa and captive power plant of 150 MW and started commercial operations on March 31, PCIL along with the promoter, Mr P Prathap Reddy, has entered into a share buy-back agreement with IFCI of Rs.150 crore for investment made by the latter in AAL. Since PCIL has infused Rs.494 crore (the entire committed capital of Rs.488 crore), any funds requirement will be met through the promoter only. The ratings of PCIL are highly sensitive to exposure towards the group companies. Prospects With Government of India s increased focus on infrastructure projects and promotion of low cost housing, the demand for the cement industry is stable in the long term. PCIL s prospects depend upon economic revival and the company s ability to diversify into new markets and maintain the growth rate amid the challenging market scenario. Financial Performance (Rs.Cr) For the period ended / as at March 31, (12m, A) (12m, A) (12m. A) Working Results Net sales Total Operating income PBILDT Interest Depreciation PBT PAT (after deferred tax) Gross Cash Accruals Financial Position Equity share capital Networth Total Capital Employed Key Ratios Growth Growth in Total income (%) Growth in PAT (after D.Tax) (%) (-30.05) (-48.62) Profitability PBILDT/Total Op. income (%) PAT (after deferred tax)/ Total income (%) ROCE (%) Solvency Long-term Debt Equity ratio (times) Overall gearing ratio(times)

4 For the period ended / as at March 31, (12m, A) (12m, A) (12m. A) Interest coverage(times) Term debt/ Gross Cash Accruals (times) Total debt/ Gross Cash Accruals (times) Liquidity Current ratio(times) Quick ratio(times) Turnover Average collection period (days) Average inventory (days) Average Creditors Operating cycle (days) Analyst Contact Name: Vidhyasagar L Tel: Mobile: vidhya.sagar@careratings.com (This follows our brief rationale for entity published on 20 March, 2014) DISCLAIMER CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. 4

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