| One of the integrated Southern region player with extensive distribution network
PCIL’s cement production capacity is estimated to represent ~5-5.5 percent of the total cement production capacity in South India comprising Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, Andaman and Nicobar Islands, and Pondicherry. PCIL, a regional player, has a strong hold in the local market they are operating in, due to cost leadership and market advantage along with close proximity to raw material sources. Besides, PCIL operates an integrated facility supported by infrastructure for limestone extraction and crushing, production of clinker and cement by inter-grinding clinker along with fly ash/ slag/ gypsum, packing facilities, and a quality control lab. PCIL operates 4 integrated manufacturing facilities and 2 grinding units with an aggregate cement production capacity of 10.00 MMTPA, as of March 31, 2023.
PCIL’s business operations are supported by an extensive sales and distribution network spread across South, West, and East India. PCIL’s cement products are sold to the trade segments (which typically incudes retail customers and wholesale customers including dealers and distributors who then resell products to retail customers) and the non-trade segments (which typically includes government and private infrastructure projects, real estate companies, and ready-mixed concrete stations).
Acuité believes that PCIL’s established position in the Southern region and Integrated facilities along with extensive distribution network will aid its business operations going forward.
Strategically located manufacturing facilities with proximity and access to its key raw materials
PCIL’s facilities are strategically located to enable accessing the markets in Hyderabad, Vishakhapatnam, Bengaluru, Chennai, Pune, and Ahmednagar, which provides significant convenience in logistics management and cost benefits. Each of its facilities are well connected to both the national highway and railway network providing easy transportation of laterite, coal, clinker, gypsum, slag and cement, as required. In addition, its Krishnapatnam grinding unit is located at approximately less than 280 kms, 290 kms and 320 kms from its integrated manufacturing facilities at Talaricheruvu, Boyareddypalli and Ganeshpahad, respectively, while the Patas grinding unit is located at approximately less than 418 kms from its Tandur facility. With Krishnapatnam grinding unit, packing terminals at Cochin, Gopalpur, Karaikal and Colombo ports and a proposed packing terminal at the Kolkata port, PCIL is likely to become one of the few market players in India with superior port-based logistics infrastructure and distribution facilities. Efficient raw material sourcing of limestone, gypsum and fly ash, and coal, near its integrated manufacturing facilities, has a direct result on cost of production and profitability as well as ensuring protection against operational risks. Further to meet its coal requirements, PCIL’s facilities are supported by a 77.00 MW captive power plant, at Ganeshpahad facility, along with WHR units with an aggregate capacity of 32.00 MW, at Ganeshpahad and Boyareddypalli facilities. PCIL met ~23 percent of its power requirements through captive sources in FY2023E against 48 percent in FY2022.
Further, it optimizes its coal procurement by sourcing coal and pet coke from the international markets and coal through coal linkages with Singareni Collieries Company Ltd (SCCL) located in the state of Telangana. PCIL depends majorly on imports for its coal requirement; it imported 78.94 percent of its total coal required in FY2023E against 91.79 percent in the previous year. For Limestone, PCIL has 7 captive long term mining leases for its integrated manufacturing facilities, which are pit head mines having a lead distance of within 6 kilometres, providing its integrated manufacturing facilities with a stable and timely supply of limestone in a cost-efficient manner. The residual reserves of PCIL’s mining leases with respect to the mines currently operated are sufficient for its current production capacity for upto next 3 decades, based on the stipulated amount of annual excavation specified in its mining leases. In addition to utilizing fly ash from captive power plant at Ganeshpahad facility, PCIL procures fly ash from other coal-fired power plants located near its integrated manufacturing facilities. For Krishnapatnam grinding unit, the company has been able to access relatively low-cost fly ash by virtue of being in close proximity to fly ash sources. Further, it obtains gypsum and slag from nearby fertilizer companies and steel manufacturing plants, respectively.
Acuite believes that PCIL’s strategically located manufacturing units and packing terminals, together with port-based logistics infrastructure and distribution strategy, would provide PCIL access to the coastal markets and will also enable it to serve markets in East and West India along with improvement in its logistic and EBITDA per MT cost.
Funding support from the promoters
During FY2023E, NCDs of Rs. 350 Cr were issued against planned Rs. 600 Cr, and the proceeds were utilized towards capital creditors repayment of Rs. 190 Cr and long-term working capital of Rs. 110 Cr. NCDs have been subscribed to by Edelweiss Alternative Investments, having a tenor of 5 years. For the ongoing capex in its subsidiary, Marwar Cement Limited, the company has availed a sanction of Rs. 1430.20 Cr from Canara Bank. The total project cost is Rs. 2046.70 Cr. The funding pattern is equity to debt of 30:70. Of the equity portion (30 percent), which is Rs. 616.50 Cr, the promotor has already spent around Rs. 400 Cr. The balance would be brought in as and when required. The capex is expected to be completed by the end of FY2025. Further, promotors have brought in Rs. 212.90 Cr in FY2024, and another Rs. 100 Cr is expected by the end of August 2023 as unsecured loans (subordinated to bank borrowings and hence considered quasi-equity) to support the incremental working capital requirements. Also, additional funds would be brought in towards the end of FY2024, for reduction in debt by the promoters through monetisation of their personal assets.
The infusion of funds by the promoters in the form of quasi equity along with reduction in existing debt is expected to de-leverage the balance sheet and counter the additional load-up of Rs. 1430.20 Cr of debt towards capex onto the balance sheet of PCIL. Acuite believes that the timely receipt of expected funding support by the promoters will remain a key rating monitorable.
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| Highly susceptible to volatility in input cost and realisations, in the cement industry
Capacity addition in the cement industry tends to be periodic because of the long gestation period for setting up a facility and the numerous players adding capacity during the peak of a cycle. This leads to unfavorable price cycles for the sector. Moreover, profitability remains susceptible to volatility in input prices, including raw materials, power, fuel, and freight. Realizations and profitability are also affected by demand, supply, offtake, and regional factors. PCIL remains exposed to fluctuations in fuel prices in addition to the risks of volatile cement prices, given the oversupply situation in South India. PCIL reported lower-than-estimated Earnings before Interest, tax, and depreciation (EBITDA) in FY2023E at Rs. 103 Cr and missed Acuite’s estimates by a huge margin. The EBITDA margin was lower than the estimates due to higher-than-expected coal and pet coke prices persisting through FY2022 and FY2023. The EBITDA/MT declined to Rs.265/MT in FY2023E as compared to Rs.699/MT in FY2022. The aforesaid decreased due to power cost/ MT rising from Rs.1,661/MT in FY2022 to Rs.2333/MT in FY2023E. The power and logistic costs have been the major contributors to its total costs, forming around 45 percent of its total cost in FY2023E compared to 35 percent in FY2022. Acuité believes that PCIL’s ability to do better inventory and price management and its ability to pass on the price hikes will remain crucial for the rating over the medium term.
Highly Leveraged Capital Structure and weakening of key credit metrics
The tangible net worth of PCIL stood at ~Rs.1006 Cr as on March 31, 2023E against Rs.1084 Cr as on March 31, 2022.The gearing (debt to equity ratio) moderated to 1.46 times as on March 31, 2023E against 1.16 times in FY2022. The total debt stood at ~Rs.1467 Cr as on March 31,2023E against 1261 Cr as on March 31,2022. The debt/EBITDA deteriorated to 13.90 times for FY2023E against 2.66 times for FY2022, primarily on account of net losses and increased indebtedness. The debt service coverage ratio (DSCR) stood at 0.41 times in FY2023E against 0.95 times in FY2022 and interest coverage ratio at 0.49 times in FY2023E against 2.08 times in FY2022. The NCA/TD stood at (0.02) times in FY2023E against 0.14 times in FY2022.
Acuite believes, that the funding support by the promotors, will be crucial to aid operations and reduction in gearing levels over the medium term.
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