Shivam Cements Limited to raise short term and long term loans worth Rs.4.84 Arba; ICRA Nepal assigns top ratings

Shivam Cements Limited (SHIVM) is looking to raise long term and short term loans worth total of Rs.4.84 Arba. ICRA Nepal has assigned a long-term rating of [ICRANP] LA to the long-term loans worth Rs.2.12 Arba of Shivam Cements Limited (SCL). ICRA Nepal has also assigned a short-term rating of [ICRANP] A1 to SCL’s short-term loans (including non-fund based limits) worth Rs.2.72 Arba.

The assigned ratings take into account the strong operational and financial profile of SCL, which manufactures cement through its grinding unit of ~1million metric tons per annum (MTPA).The phase-wise capacity enhancements over the years has made SCL one of the largest cement manufacturing units in Nepal. Additionally, the improving capacity utilization of the plant has aided the healthy sales growth momentum (~38% during FY 2015-FY 2018). The ratings also take comfort from the company’s established brand presence and strong market position, which has supported healthy cement realizations over the years, and hence stable profitability margins. Additionally, the demand outlook for the cement industry in Nepal is good owing to increasing construction activity in the form of large proposed/under-construction infrastructure projects in the country.

The rating action also takes into consideration the company’s strong promoter profile, comprising individuals from various large/reputed business houses of Nepal, who have extensive experience across diverse businesses including manufacturing (mainly edibles processing, FMCG, among others), trading, hydropower, etc. The promoters have injected equity in a timely manner for capacity enhancements and investment in a joint venture (JV) cement company, while keeping the gearing levels in check. This, along with SCL’s improving internal accruals, has resulted in a robust capital structure and coverage indicators with gearing of 0.54x as of mid-January 2019, interest coverage of ~6x and total debt/OPBITDA of 1.4x times in H1 FY2019.

Nonetheless, the ratings are constrained by the intense competition in the industry given the presence of several players, while the overall market size remains small. The ongoing large capacity additions in the industry could lower the pricing flexibility further, thereby constraining the company’s ability to pass on input cost increases to the customers. SCL’s margins are also exposed to the cyclicality inherent in the cement industry as well as price trends for raw materials and other inputs. The company’s high working capital intensity (NWC/OI of ~27% in H1 FY 2019) also remains an area of concern. However, this could be cushioned by SCL’s unutilized drawing power limits (~20% surplus drawing power as of mid-January 2019), which provide some comfort. Going forward, SCL’s ability to attain healthy sales growth, amid challenges imposed by tightening liquidity, and maintain comfortable debt coverage indicators while withstanding competitive pressure and judiciously managing its working capital, will remain the key rating sensitivity.