Rationale

The rating favourably factors in the improving operating performance of Kesoram Industries Limited (KIL), reflected in the increase in OPBIDTA/MT in FY2021 and FY2022. ICRA estimates the operating profits to be higher by 42-46% in FY2022, driven by increase in sales volumes and net sales realisations and better absorption of fixed costs. Despite the expected pressure on the OPBIDTA/MT in FY2023 due to rising input costs of fuel such as coal, pet coke and diesel, the focus on increasing the share of blended cement along with volumetric growth is likely to support the OPBIDTA to an extent. In FY2022 and FY2023, ICRA expects KIL to report a sales volume growth of around 31-33% and 5-7% YoY, respectively. KIL's sales volumes in the last three years have been constrained at 5.4-6.4 million MT levels due to the prevailing liquidity issues during that period. In 9M FY2022, the sales volume increased 45% YoY, supported by improved liquidity post the one-time settlement with lenders in Q4 FY2021. Further, the long-term demand prospects are positive, given the government's thrust on affordable housing and infrastructure segments. The rating also factors in the proceeds from KIL's rights issue of Rs. 399 crore as of March 2022 (including Rs. 50 crore of ICD infused by the promoters in H1 FY2022 which has been converted into equity), which has improved KIL's liquidity. Of the rights issue proceeds, Rs. 55 crore was used to repay non-convertible debentures (NCDs) in November 2021 and Rs. 293.9 crore to prepay1 optionally convertible debentures (OCDs) in January 2022. The rating also factors in KIL's track record of operations in the cement manufacturing business with an established presence in Maharashtra, Telangana and Karnataka. The company's vertically integrated cement operations, supported by clinkerisation facility of 6.3 MTPA, captive limestone mines and a captive thermal power plant of 94.2 MW also support the rating. Further, the good quality limestone reserves at Sedam in Karnataka aid in cost efficiency. The assigned rating, however, is constrained by the company's modest financial risk profile and exposure to refinancing risk. The company's financial profile is characterised by adverse capital structure and modest coverage indicators due to the high estimated adjusted debt2 levels of around Rs. 2145-2150 crore3 as on March 31, 2022. Despite the improved OPBIDTA, the large debt and high cost of borrowings resulted in a moderate interest cover of 1.6 times in FY2021. Although the company has prepaid OCDs worth Rs. 293.9 crore on January 31, 2022, the adjusted TD/OPBIDTA is likely to remain at ~3.7-4.1 times in FY2022-FY2023. The adjusted DSCR4 is likely to improve to around 1.3-1.4x in FY2023, supported by the lower debt obligations (due to prepayment in FY2022) in FY2023 from less than 1x in FY2022, where the debt repayments were supported by the rights issue proceeds. KIL is also exposed to refinancing risk, with 78% of the debt amortising in February 2026 and high premium on redemption. Moreover, the absence of any sanctioned working capital limits may adversely impact the company's ability to fund the incremental working capital requirements, should the need arise. Nonetheless, KIL has plans to refinance the existing high cost debt at more favourable terms by Q1 FY2023, which is likely to support the debt coverage metrics going forward. ICRA also notes the cyclicality inherent in the cement industry which leads to variability in profitability and cash flows. Further, KIL's operating profitability remains susceptible to the fluctuations in input prices. Any incremental investments or support to subsidiaries or Group companies by KIL will also remain a key monitorable. The Stable outlook on the long-term rating reflects ICRA's opinion that KIL will continue to benefit from its established presence in the western and southern region and generate healthy cash accruals from the business which will support its refinancing ability.