Rationale

 The rating favourably factors in the improvement in operating performance of Kesoram Industries Limited (KIL) in FY2021 and FY2022, driven by an increase in OPBIDTA/MT and operating profits owing to growth in sales volumes, 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, KIL reported growth in sales volume of ~37% YoY and in FY2023, ICRA expects KIL to report a sales volume growth of around 6-8% YoY. KIL's sales volumes till FY2021 have been constrained at 5.4- 6.4 million MT levels due to the prevailing liquidity issues during that period. In FY2022, the strong growth in sales volume was attributable to the improved liquidity post the one-time settlement with lenders in Q4 FY2021, as well as an increase in the sale of blended cement by ~37% YoY. Further, the long-term demand prospects are positive, given the Government's thrust on affordable housing and infrastructure segments. The rating factors in the proceeds from the rights issue of Rs. 399.4 crore as of June 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. In May 2022, the company has further prepaid OCDs to the tune of Rs. 47.09 crore. KIL's has around Rs. 103.47 crore of debt repayments for remaining of FY2023, which is expected to be met from the cash flow from operations. The rating also notes KIL's track record of operations in the cement manufacturing business with established presence in Maharashtra, Telangana and Karnataka. The company's vertically-integrated cement operations, with 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. Its financial profile is characterised by adverse capital structure and modest coverage indicators due to the high adjusted debt2 levels of around Rs. 2,148 crore3 as on March 31, 2022. Despite the improved OPBIDTA, the large debt and high cost of borrowings resulted in a moderate adjusted interest cover 4 of 2.3 times in FY2022. Although the company has part-prepaid NCDs and OCDs in FY2022, the adjusted TD/OPBIDTA was elevated at 3.9 times and the adjusted DSCR stood at 0.7 times in FY2022. While the TD/OPBIDTA is likely to remain high, the adjusted DSCR is likely to improve to around 1.3-1.4 times in FY2023, supported by the lower debt obligations in FY2023 due to prepayment in FY2022. KIL is exposed to refinancing risk, with 78% of the debt amortising in February 2026 and high premium payable 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 plans to refinance the existing high cost debt at more favourable terms in the near term, which is likely to support the debt coverage metrics going forward. ICRA 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 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.