Fitch Ratings has today assigned Rashmi Cement Ltd (RCL) a 'BB+(ind)' National Long-term rating. The Outlook is Stable. At the same time, the agency has assigned the following ratings to the RCL's various bank loans:
- INR137.2m outstanding long-term debt (as at 31 December 2008): 'BB+(ind)';
- INR1045.0m Cash Credit (CC) limit: 'BB+(ind)'; and
- INR722.0m non-fund based facilities: 'F4(ind)'.
The ratings reflect the company's operational (EBITDA) losses in its cement division during FY07 and FY08, coupled with low capacity utilisation in its sponge iron division. The loss made in the cement division was mainly due to a lack of backward integration which exposes RCL to raw material volatility risks. Fitch notes that almost 50%-70% of RCL's revenues are generated from exports of iron ore fines for FY06-FY08, a segment which is exposed to high risks in terms of the Government of India's (GOI) regulations.
Over FY06-FY08, RCL exported almost 50%-70% of its iron ore fines to China. However, with a global slowdown in steel demand, RCL's exports are likely to be under pressure, which would stretch cash conversion cycles as realisations are faster in the case of exports, as compared to the domestic market. RCL procures clinkers, its main raw material for the cement division, in the spot market or through imports. With the volatility in clinker prices, this carries high inventory risk if RCL is not able to pass on price hikes to customers. Fitch believes that RCL's ability to pass on input price volatility to its end customers are limited and will be a key factor affecting its EBIDTA margins. The iron ore used in its sponge iron division is bought on a spot basis and inventory levels are maintains before orders are secured.
The company reported net sales of INR2610.7m in FY08 (FY07: INR1605.3m). RCL's Operating EBIDTA margins improved in FY08 to 12.8% (FY07: 9.9%) primarily due to an improved demand of iron ore fines from China supported by its efficient logistic infrastructure. RCL's leverage (Total Adjusted Debt net of cash\Operating EBIDTA) also improved in FY08 to 3.1x (FY07: 3.4x). The company's free cash flows continued to remain negative over the past four years from increased working capital requirements and higher capital expenditure. The increasing trend in working capital to INR793.6m in FY08 from INR76.6m in FY05 was mainly due to an increase in average inventory period to 105 days in FY08 from 70 days in FY05.
Substantial debt-funded acquisitions/capex and a deterioration in leverage (net debt/operating EBITDA) could affect RCL's key credit metrics and put downward rating pressure on its ratings.
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RCL, incorporated in 1991, was initially engaged in the trading business of cement and steel and moved gradually into the manufacturing business. RCL is a diversified player with manufacturing facilities in cement and steel, with an installed capacity of 100,000 MTPA for both cement and sponge iron. The company has an iron ore crusher plant with an installed capacity of 540,000 MTPA. The company is expanding its cement and sponge iron manufacturing facility to 150,000MTPA and 200,000MTPA, respectively. The total cost of the project is INR1250m and would be funded by internal accruals and equity from promoters.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.
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