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TABLE OF CONTENTS

1. State of Indian Economy 09


2. Banking & Financial Sector 14
3. Sectoral Overview 18
• Telecom 24
• Real estate 30
• Power (Conventional) 36
• Sugar 44
• Textiles 51
• Machinery 59
• Infrastructure 66
• Gems and Jewellery 74
• Mining 80
• Tourism and Hospitality 87
• Ferrous Metals 93
• Fertilizers 100
• Chemicals 116
• Power (Renewable) 113
• Cement 120
• Auto Ancillaries 126
4. Acuité Company Profile 133
FOREWORD
These are surely busy times if not the
best of times for credit profession-
als. The volatility in both the global
and the domestic financial markets
is touching new highs. Trade wars,
oil prices and political uncertainty
have created turbulence in the mac-
roeconomic landscape all over the
world. Consequently, even stable businesses have been fac-
ing strong headwinds. For many leveraged companies and
business groups, liquidity management and refinancing of
existing debt have proved to be a significant challenge.

Our publication on “India Credit Risk Yearbook-2019” comes


Trade wars, oil prices at such an important juncture. We believe investors will gain
and political uncertainty from the interesting perspectives on sixteen key sectors of
has created turbulence in the Indian economy to the bankers and investors.
the macroeconomic land- This volume is a product of our credit research team which
scape all over the world. conducts incisive research on the economy, the corporate
Consequently, even sta- and the financial sector as well as the key industrial sec-
ble businesses have been tors. While the research team’s primary objective has been
facing strong headwinds. to support the quality of our ratings, we wish to make the
content thus generated available to all our important stake-
holders including bankers and investors.

Acuité means sharpness of thought and intellect. We have


completed over 7,300 credit rating assignments for various
debt instruments including bonds, commercial paper and
bank loans of both large enterprises, financial services com-
panies and SMEs across a diverse set of industries.

It is our aspiration to not stop at developing Acuité into a


responsible credit rating agency but a knowledge company
with solid analytical depth, robust research capabilities and
technologically driven systems and processes that will de-
liver value to all our stakeholders. We look forward to your
support as we continue to progress towards these goals.

Warm Regards,
Sankar Chakraborti

CEO
India Credit Risk Yearbook-2019

S TAT E O F T H E ECO N O MY

India Macro Report: State of The Economy


Summary
Acuité Ratings continues to maintain a positive outlook on the Indian macroeconomic land-
scape. While there were indeed several domestic and global headwinds that had led to eco-
nomic uncertainty during the current year, their intensity has not only subsided, but the econ-
omy has also developed a resilience against these threats. We expect the economy to print
an overall 7.5% GDP growth in FY19, the headwinds in the second quarter notwithstanding.
One of the key aspects of economic resilience is that the threat of inflation seems to be under
control with the headline inflation number remaining consistently below the targets of RBI. From
the aggregate demand perspective, India remains the fastest growing major economy in the
world. While the Q2 number disappointed a bit, the overall consumption led story shows a
promise of sustainability.
The government expenditure currently remains the primary driver of growth with green shoots
being witnessed in capital formation. Acuité believes that the maintenance of adequate sys-
temic liquidity is the key to the sustainability of the India growth trajectory. While there were
challenges in the liquidity scenario in late Q2, RBI has subsequently taken suitable measures to
maintain adequate system liquidity that has led to the easing of the differential between the
repo and the weighted average call money rate (WACR), which was in the negative domain
during some periods between August – December 2018.

9
Acuité Ratings & Research India Credit Risk Yearbook-2019

There are also nascent signs of revival in the debt capital markets which have been languish- Liquidity Operation by RBI
ing due to interest rate volatility and significant duration risks. The headwinds from the global
financial markets on the other hand seem to have dropped off for now but one cannot take 4.00 LFA Operation Repo-WACR (Right Scale)
0.25
down guard in such a volatile environment. Although we are confident about the resilience of 2.00
the domestic economy, the government needs to do a fine balancing act which while ensuring
0.00 0.20
the activation of all growth engines in the economy, will also reflect fiscal prudence.

Base Point
Rs.Lakh cr
-4.00
0.15
Macro-economic Projections* -8.00
-10.00 0.10
-12.00
0.05
-14.00
GDP Growth (FY19) Overall IIP (FY19) Credit Offtake (FY19)
-16.00 0.20
Jan-18 Feb-18 Mar-18 Apl-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

7.5% 4.7% 10.5%


Source: Acuité Research, RBI
7.6% (H1, FY19) 5.1% (H1, FY19) 13.6% (Nov, FY19)
(Updated Jan, 2019) (Updated Jan, 2019) (Updated Jan, 2019) Corporate Bond Position (in Rs. Lakh Cr)

Outstanding-end period (Rs Lakh Cr) Issued (RHS)


Interest Rate (FY19) Consumer Inflation (FY19) USD-INR (FY19) 1.9% 28.4 28.4
1.7% 1.7%
1.5% 27.4

6.5% 3.8% 72.21 26.5 1.3%


25.9 1.21%
6.5% (Dec, FY19) 4.2% (As on Dec, FY19) 70.73 (Jan, 2019)
(Updated Jan, 2019) (Updated Jan, 2019) (Updated Jan, 2019) 24.8

* The figures in bold are projections for FY19

Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

#1-year Market Challenge: January FY19 Vs. January FY18


Source: RBI, Note: Net injection (+) and Net absorption (-)
¡¡ Signs of a flattening yield curve

¡¡ Yields on short term Government debt instruments up 40 bps


Debt Market Outlook
¡¡ Yields on 10-year Government debt instruments down by 13 bps
For much of this year, while corporate bond issuances recorded an over 30% decline, green
¡¡ Corporate debt riskier as AAA Vs. 10-year G-Sec is now 128 bps (as compared to 50 bps a
shoots are seen. This is primarily driven by an expectation that RBI may return to a neutral
year before)
stance by the next MPC meeting, given the benign inflation outlook as well as the dovish stance
¡¡ Credit to Deposit touched a record high of 80% (74% a year back) of the US Fed Governor. The market, nonetheless, continues to discount Indian debt higher than
We decided to extend the 1-year challenge to the Indian economy and the results have been usual given the elevated US/ India 10-year G-Sec differential and India 10-year G-Sec/ AAA
interesting. After the rate hike cycle starting in June 2018, the Repo rates increased by 50 bps Corporate Bond spreads. Going forward, the increased differentials are expected to moderate,
within a 2-month period. However, the weighted average call money rate (WACR) has been
pushing up issuances. The access to funds for NBFCs is also likely to improve in the near term
volatile despite the 50-bps differential maintained with the repo rate on average during the
one-year period. The overnight lending rate highlighted the challenges for banks as liquidity with a revival in bond issuances for highly rated companies and the pick-up in the volume of
deteriorated during the year. retail securitisation transactions.

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Acuité Ratings & Research India Credit Risk Yearbook-2019

Inflation Outlook However, the government has already committed a larger capital outlay for the public sector
for the current year at Rs. 1.06 lakh Cr which includes an additional amount of Rs. 41,000 Cr.
One of the key aspects of the economic resilience is that the threat of inflation has subsided
over and above the amount budgeted for FY19. This is likely to improve the capital position of
in the near term with the headline inflation number remaining consistently below the targets
several weak banks who are now expected to emerge from the shadow of the Prompt Cor-
of RBI. The RBI, which raised rates in accordance with its inflation expectations in June and
rective Action (PCA) category and revive their lending activities.
August 2018 has already indicated a stance away from calibrated tightening. With the hog
cycles taking shape in India’s food basket, food category inflation has been significantly im- Global Outlook
pacting the overall CPI print. RBI expects headline inflation to remain range bound (3.9%-4.2%)
The headwinds from the global financial markets seem to have dropped off now but one
by the end of FY19 and the print not to exceed 4.5% in Q1 FY20, the latter figure being RBI’s
cannot take down guard in such a volatile environment. While there seems to be a consensus
medium-term target level.
between US and Chinese trade negotiators regarding the tariff dispute, things seem desultory
Demand Outlook at best. The lack of consensus in the December 6, 2018 OPEC meeting regarding production
controls (as well unfruitful negotiations with Russia) along with lack of American support for
From the aggregate demand perspective, India remains the fastest growing major economy
COP 24 are bigger risks to be considered. For now, oil prices along with other commodities
in the world. The government expenditure remains the primary driver of growth with green
are stable and are aiding the current account balance of import dependent emerging markets
shoots being witnessed in capital formation. While the OBICUS survey reveals that capacity
such as India.
utilization levels have diminished to around 73% in H1 of the current financial year, firms are
positive about their pipelines and new orders. The IIP and core industries too have shown Concluding Remarks
signs of consistency over the last 2-3 months. Strong show by the manufacturing sector has
Although Acuité is confident about the resilience of the domestic economy, there are upcoming
been resonating well with the healthy consumer durable and non-durable consumption and
events which it believes, demand a constant vigilance on several macro-economic variables
demand for capital goods. We also see a shift to higher value-added categories, augmenting
particularly the fiscal deficit. With the national elections on the horizon along with the conclud-
GVA figures. Also, the PMI manufacturing for November 2018 has reached a 9-month high
ed state elections, the demands for populism are set to increase as reflected in the recently
level. The index’s two months lag with IIP augurs well for the domestic manufacturing sector
announced farm loan waivers in the states of Rajasthan, Madhya Pradesh and Chattisgarh.
in the near term.
While the government needs to maintain a growth oriented economic environment through
Liquidity Outlook efficient public expenditure, it also has to demonstrate fiscal responsibility.

Acuité believes that the maintenance of adequate systemic liquidity is the key to the sustain-
ability of the India growth trajectory. While there were challenges in the liquidity scenario in
late Q2, RBI has taken suitable measures to infuse liquidity which has led to the easing of the
differential between the repo and the weighted average call money rate (WACR). Over the
past 2 months, the ratio, however, has been hovering in the vicinity of 7-12 bps, bringing about
a semblance of comfort in the money markets. Commercial Paper issuances have rebounded
with over 35% growth YTD after a sudden dip in the second quarter. The relaxation of high
quality liquid assets (HQLA) maintenance norms for banks are also expected to shore up the
liquidity position.

Bank Credit Outlook

The banking NPA crisis has already taken a significant toll on the lending ability of commercial
banks particularly the public sector segment. While credit growth has jumped to 14.2% yoy in
the April-December period, several sectors including MSME, infrastructure and NBFCs continue
to face challenges in mobilising funds.

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Acuité Ratings & Research India Credit Risk Yearbook-2019

Industry background and characteristics


BANKING & FINANCIAL Credit growth picked up momentum in the banking sector in FY19 after three sluggish years
which was also characterised by a sharp spurt in corporate delinquencies. It has been driven
by a revival in corporate credit arising from a higher demand scenario and partly also due to
a lacklustre bond market. The growth in retail credit has continued to be steady but has also
received a boost through portfolio buy-outs from NBFCs post the recent liquidity crisis in the
sector.
The implementation of the PCA (prompt corrective action) framework which led to 11 public sec-
tor banks (PSBs) being categorised as PCA banks had led to a sharp drop in credit growth (1%
YoY) of PSBs in FY 18. This allowed private sector banks to gain market share steadily to 30% as
of Mar-18 from 21% as of Mar-15 driven by a robust credit growth of 20% in the same period.
In FY19 however, public sector banks (non-PCA category) are seeing a healthy revival in their
advances as fresh slippages and asset quality challenges recede. They grew by 9.1% (YoY) in
H1 FY 19 as against 2.5% in FY 18. However, slower deposit growth has resulted in C-D (credit
to deposit) ratio rising to 78% after staying at 74% over the previous 2 years.

Deposit costs to rise from 3 year lows


CASA deposit increasing Decline in cost of deposit

CASA share for SCBs PSBs Pvt Sector Banks


CASA share for PSBs
CASA share for Pvt Sector Banks

45.0% 43.5% 6.5%


43.1% 6.2%
6.0% 6.1% 5.7%
40.0% 39.3% 40.0%
38.7%
5.5%
38.7% 5.6% 5.1%
India Report: State of the Banking Sector 35.0% 34.2% 37.4%
5.0%
4.9%
32.7% 4.5%
30.0%
Pick-up in Credit growth in FY19 4.0%

25.0% 3.5%
March March March 2015–16 2016–17 2017–18
Advances Deposits
2016 2017 2018
March Sept March
16.0% 15.0%
2018 2018 2019 (E)
13.1% Source: RBI, Acuité Research Source: RBI, Acuité Research
12.0% Agriculture 3.8% 5.8% 8.0%
10.1%
7.0%
7.8% Low cost CASA deposits had increased sharply in FY17 primarily due to the impact of demon-
8.0% 9.3%
8.7% Industry 0.7% 2.3% 16.0% etisation. PSBs were the biggest beneficiary with their low-cost deposits increasing by nearly
6.9% 6.1% 5% as on March 31, 2017. This coupled with the declining interest rates had brought down
4.0%
Services 13.8% 24.0% 16.0% the banks’ borrowing costs as compared to the previous two years.
2.8%
0 However, this phase has been replaced by a tighter liquidity scenario in FY19. The preference
March March March Sept March RetaIil 17.8% 15.1% 17.0% for cash and higher returns in alternative avenues such as mutual funds is reflected in a de-
2016 2017 2018 2018 2019 (E)
cline in incremental CASA deposits. This would in turn steadily increase the cost of borrowing
and impact the net interest margins of banks. Deposit growth in the sector needs to gain
momentum to keep pace with the rise in credit growth so as to keep the liquidity position in
Source: RBI, Acuité Research
banks comfortable.

14 15
Acuité Ratings & Research India Credit Risk Yearbook-2019

Early trend of a turnaround in asset quality Significant infusion of equity capital amounting to Rs. 2.5 trillion over FY 2015-2019 has
helped to offset asset quality challenges faced by the PSBs over past four years. In particu-
NPA slippages reducing in FY19 NPAs declining gradually lar, capital infusion of Rs. 1.15 trillion helped to offset the aggregate losses of Rs. 0.97 trillion
over FY 17-FY 18. Additional capital of Rs. 410 billion in FY 19 likely to offset PSBs’ inability to
raise capital from equity markets. Most non-PCA banks (especially large PSBs) are comfort-
PSBs Pvt Sector Banks Gross NPAs (Rs. Trillion) Gross NPAs (%)
ably placed to support growing credit needs while meeting regulatory capital requirements
12.0 15.0%
However, PCA banks are likely to only meet Tier I CAR requirements. They are expected to
11.5% 10.8%
10.0 10.5% remain short of meeting even relaxed CCB (capital conservation buffer) requirements (2.5%
9.4% CCB to be now met by March 2020 as against March 2019 earlier). In addition to continued
8.0 10.0%
7.5%
losses, recall of AT-1 instruments by PSBs under PCA accentuated pressure on capitalisation.
6.0 With fresh capital infusion and declining losses, three banks have already exited the PCA
4.3% category in the current banks and more banks may follow suit next year.
4.0 5.0%
3.8%
The weak capital and the severe asset quality challenges in PSBs however, presented an
2.0
opportunity for private sector banks. With their comfortable capitalisation, they continue to
2014-15 2015-16 2016-17 2017-18 H1 0.0 0.0% be well placed to grow aggressively while having access to capital from the markets given
Mar Mar Mar Mar Mar Sept Mar
2018-19 2014 2015 2016 2017 2018 2018 2019 (E) the attractive valuations.

Source: RBI, Acuité Research Source: RBI, Acuité Research


Lower incremental corporate stress to improve profitability
H1 FY 19 saw a sharp decline in slippages to NPA at Rs. 1.6 trillion as against Rs. 14.0 trillion over
the past 3 years. The slippage ratio is expected to moderate to around 3.5% in 2018-19 after
remaining high at above 5.0% annually over past 3 years. Banks’ profitability (RoA) picking up
PSBs’ (non-PCA) operating profitability is
Furthermore, the ongoing resolution of NCLT referred cases is expected to support a reduction PSBs Pvt Sector Banks set to improve this fiscal supported by loan
in NPA levels; major recoveries held up in the NCLT processes are likely in CY2019. The resolution book growth and lower incremental slip-
of 2 large accounts viz. Bhushan Steel and Electro Steel Steels amounting to Rs.0.55 trillion of pages. PSBs’ NIM increased to 2.4% (annu-
debt in Q1FY2019 served as a major respite. The resolution of cases like Jyoti Structures, Bhu- 2.0%
1.5%
1.3%
alized) in H1 2018-19 from 2.1% in 2017-18.
shan Power & Steel, Monnet Ispat etc. would bring in recoveries for about Rs 1.0 trillion in H2 1.1% 1.1% 1.2% The moderation in yields in Q3 2018-19 is
FY19. However, there has been no significant recoveries in the second list of NCLT cases and 1.0%
also set to result in a reversal of MTM loss-
this can continue to be a challenge for the large corporate banks.
es on investment portfolio
Gross NPAs in the banking system are expected to moderate to between 10.0-10.5% by March 0.0%
What is encouraging is that PSBs’ provi-
2019 driven by a significant decline in stressed assets. SMA-2 accounts stand at a low of -0.1% -0.1%
-0.4% sioning coverage ratio (PCR) improving
1.1%, indicating lower risk of fresh slippages. Further, there are expectations of recoveries and -1.0% -0.7%
upgradation in existing NPAs. The dispensation on restructuring provided for MSMEs will also
-0.8% steadily: 51% as of Sep. 2018 from 41% as
help banks provide additional funding and address the liquidity challenges in the sector. of Mar. 2018.
H1 2018–19
2015–16 2016–17 2017–18 2018-19 (E) It is likely to be 60% by Mar 19 due to NPA
Capital availability mitigated stress in the sector ageing and crystallised losses or haircuts
Source: RBI, Acuité Research on NCLT cases/stressed assets in power
Tier I CAR improving Private sector banks’ earning profile improving and other sectors.
PSBs Pvt Sector Banks Operating Profit (` cr) Net Profit/(Loss) However, continued high provisioning costs might result in PSBs reporting losses in FY 19 as
Provisions and Contigencies well; 15 of 21 PSBs reported losses in Q2 2018-19 and 17 of 21 PSBs reported losses in H1
2018-19.
16.0%
1114
14.2% ~14.3% 1018 On the other hand, private sector banks are expected to report healthy profitability. NIMs
14.0% 13.2% 13.3% 841 increased to 3.5% (annualized) in H1 2018-19 from 3.3% in 2017-18 and PCR is expected to
696 improve to 65% by Mar 2019. While RoAs may moderate due to increased provisions, they
596
12.0% are likely to absorb such pressures because of better revenue diversity, lower exposure to
428 413 422 418
vulnerable sectors and higher proportion of fee income as compared with public peers.
10.0% 9.4% 9.3% ~9.4%
9.1%
Overall, the profitability of the banking sector will continue to be depressed as reflected in
8.0% the return on assets (RoA) with a marginal improvement in FY19 from the levels of FY18. The
Mar Mar Mar Sep 2015–16 2016–17 2017–18
2016 2017 2018 2018 #only sector banks
banking sector outlook for the coming fiscal should improve further with a better credit en-
vironment and with no further surprises on large corporate exposures.
Source: Acuité Research, Company Reports Source: Acuité Research, Company Reports
16 17
Acuité Ratings & Research India Credit Risk Yearbook-2019

S EC TO R A L OV E RV I E W The average credit profile of the large High Risk Proposition


corporate sector is in the moderate to
Fertilisers 33%
high-risk zone with more than 40% of the Ferrous 33%
population in non-investment grade and Machinery 30%
Textiles 30%
nearly a fourth in the high risk B category. Chemicals 24%
Moreover, about 10% of the enterprises Mining 24%
Real Estate
are in default on their debt servicing com- 21%
Hospitality 19%
mitments. Sectors like fertilizers, ferrous Auto Ancilliary 19%
metals, machinery and textile have a third Sugar 13%

of their enterprises in the high-risk zone. Source: Acuité Research, CMIE

However, the credit landscape is not completely dark and gloomy. The overall economy is
in a revival mode with upgrades gradually outpacing the downgrades. Auto ancillaries cur-
rently have the best credit profile with the highest proportion of investment grade, upgrades
as well as a very healthy MCR. The sector is driven by the robust performance of the Auto

Credit Outlook – India Inc OEM industry.


1.15 Auto Ancilliaries
Executive Summary Ferrous Metals
14% 13%
1.10
9% 10%

Modified Credit Ratio


This report covers about 3500 rated entities (with total debt of over Rs.50 Cr) across 16 major 1.05
Mining
Power (Renewable)
10%
10%
debt intensive sectors of the Indian economy. These sectors together contribute more than 60%
Textiles 10%
1.00 8% 7%
of India’s GDP. The total debt on the balance sheet of these enterprises as of March 2018 was 9%
4% Cement
Sugar 12%
about Rs 17 lakh Cr which accounts for more than a fifth of the non-agricultural credit outstand- 0.95
3%
ing of Indian banking sector. 3% Infrastructure
0.90 Real Estate 10%
Size of bubble indicates

59 % of the entities are investment grade*


upgrades proportion
0.85
45% 50% 55% 60% 65% 70% 75% 80% 85%

25% Investment Grade Proportion


Upgraded: 10.7%
23% Source: Acuité Research, CMIE
18%

MCR: Sugar and Real estate sectors seem to be under stress on all positive credit parameters. This
12% Downgraded: 8.5% 1.03
10%
coupled with the fact that these two sectors also have a high proportion of companies in the
high-risk B rating category increase the likelihood of these sectors defaulting on their debt
Default: 9.6% unless business prospects improve significantly.
6%

4% 0%

AAA/A1+ AA A BBB BB B C D

Source: Acuité Research, CMIE


*
Ratings outstanding from any of the accredited CRAs in India, MCR – Modified Credit Ratio
(upgrades + reaffirmed to downgrades + reaffirmed)
18 19
Acuité Ratings & Research India Credit Risk Yearbook-2019

An analysis of the business pros-


Auto Ancilliaries
pects and a closer look at the sec- Brief sector overview
Low

Chemical Cement tor also validate the above con-


clusions. Auto Ancillaries, Power
Power: Renewable
(Renewables), Cement and Fertil- Telecom: High Risk
Fertilisers
Financial Risk

Telecom izer segment are least vulnerable Telecommunications industry is in high stress owing to plunging revenue and profitability amid
while Telecom, Real Estate, Sug- continuing tariff wars. The debt levels have increased continuously as the companies used
Sugar ar and Textile are currently in the borrowed funds to pay high spectrum & license fees. The industry is saddled with almost Rs.8
Real Estate highly vulnerable category. lakh Cr. of debt. Government has amended various norms with respect to spectrum & license
Textile Infrastructure with an effort to boost the health of the industry.
Real Estate: High Risk
High

The sector is in visible stress as profitability and debt protection metrics are at low levels and
Weak Business Prospects Healthy have seen a declining trend, which is unlikely to reverse in the near term. Players in the res-
idential housing segment have been facing more challenges vis-a-vis the commercial space.
Source: Acuité Research, CMIE Steady commercial real-estate space demand, the tax benefit announcements in the interim
budget 2019 and the policy push in terms of REITs, PMAY, etc. should provide some respite to
the sector over the medium term.
Based on the aforementioned arguments we have categorized the Power (conventional): Moderate to High Risk
16 sectors across the risk spectrum as depicted below:
Power Generation (Conventional) is under pressure because of below average plant load fac-
tor, liquidity issues arising from continuing payment delays from state utilities, tariff disputes,
increasingly cheaper supplies from Renewable Energy Sources and low demand growth due
High Risk to lower than expected pick up in manufacturing sector. Acuité expects the stress level in the
Telecom, Real Estate
sector to remain given the lack of availability of cheap domestic coal and natural gas for
thermal power plants and payment risks from weak distribution companies. However, given
that more than two thirds of the generation entities are govt. backed, the stress for the over-
Power (Conventional), Sugar all sector is mitigated. Of the third of the installed capacity, i.e. about 40 GW is estimated to
Moderate to High Risk be under financial stress.
and Textile, Machinery
Sugar: Moderate to High Risk
Sugar sector is currently challenged due to high cane procurement costs and therefore highly
Infrastructure, Gems and Jewellry, volatile profitability and high inventory levels in the industry arising from an oversupply sce-
Moderate Risk Mining, Tourism and Hospitality nario. While Government intervention in the sector through export facilitation etc. happens
from time to time, it may not provide adequate respite to the sector.
Textiles: Moderate to High Risk
Moderate to Ferrous Metals, Fertilisers, Chemicals,
Low Risk Textile Industry currently is currently characterised by low profitability and debt protection
Power (Renewable)
metrics. Exports have seen a decline leading to a decline in the realisations for the players.
However, stress levels are expected to ease slowly given the improving domestic demand &
Low government’s support to boost the sector.
Risk Cement, Auto Ancillaries Machinery: Moderate to High Risk
Machinery sector is moderately stressed on account of a below average financial risk pro-
file, unorganized and smaller scale of operations and high levels of imports competing with
local manufactures. Acuité expects the stress level to remain in coming years due to no signs
of pick-up of investment in capital goods manufacturing. Furthermore, the growth in capital
goods demand due to pick up in Gross Capital Formation is expected to be met through an
increasing proportion of imports.

20 21
Acuité Ratings & Research India Credit Risk Yearbook-2019

Infrastructure: Moderate Risk Cement: Low Risk


Infrastructure sector covering construction contractors is under high debt levels leading to The healthy credit quality in the sector is driven by a strong financial profile of the large
high interest expenses and lower profitability. Furthermore, increasing operational costs, cement companies well supported by an improving demand scenario. While the sector does
unrealized payments from customers and cash flow mismatch continue to cause liquidity witness challenges such as high capital cost, long project gestation period and risks of re-
challenges. gional oversupply, a consolidation in the industry and economies of scale have helped to
offset some of these challenges.
Gems and Jewellery: Moderate Risk
Auto Ancillaries: Low Risk
Gems & Jewellery sector is under moderate stress on account of stagnant growth in terms
of sales. Low demand growth for gold & jewellery is the primary cause of concern in the The low stress in the sector is on account of healthy financial risk profile on the back of healthy
industry. In FY19, bank credit especially to the diamond segment has reduced and is expect- and stable demand drivers in the domestic and export segments. Acuité expects the industry
ed to remain depressed. However, to the business environment has improved for organized to maintain its healthy financial risk profile on account of steady demand from automobile
gold jewellery companies who are expected to see incremental market share gains as they OEMs, expected healthy pricing discipline and also growing replacement market demand.
reap the benefits of GST implementation
Mining: Moderate Risk
The sample size of companies considered
Mining industry in India is in moderate risk category on account of volatile commodity pric-
es, high regulatory risk in India and high level of logistical and supply bottlenecks. Over the
medium-term, regulatory risk and infrastructural challenges will continue to put downward
pressure on production levels.
Tourism and Hospitality: Moderate Risk
The hospitality industry had witnessed a relatively high level of stress in the period FY 14-FY
16 but the current risk outlook is moderate backed by improving profitability and debt pro- 322 212
Auto Ancilliary Infrastucture
tection metrics. Acuité believes that the credit challenges in the sector would subside on ac- 612
count of healthy demand outlook that can outpace new supplies with resultant improvement Ferrious Metals
561
in Occupancy Rate, Average Room Rate (ARR) & Revenue per Available Room (RevPAR). Chemical 126 61
Power Real
Ferrous Metals: Moderate to Low Risk 322
Renewable Estate
Power
Ferrous metals sector has witnessed a drop in commodity price, below average capacity Conventioal
utilisation and cheaper imports from China over the period FY 14- FY16. However, the sector 58 43 39
has seen a subsequent improvement in risk profile because of improved price realization in Mining Telecom Fertis-
lisers
the last two years with government imposing anti-dumping tariffs to support domestic pro-
130
duction and a healthy growth in infrastructure development activity. 604 421 Toursim & 57 30
29
Gems &
Textiles Machinery Hospitality Cement Sugar Jewellary
Fertilisers: Moderate to Low Risk
The positive aspects in the sector such as improving profitability, favorable D/E ratio and
debt protection matrices are offset by a large amount of unpaid subsidy and freight bills,
resulting in working capital pressures and high interest costs.
Chemicals: Moderate to Low Risk
Sector has a healthy financial risk profile along with growing export levels. However, chal-
lenges remain in the polymer (plastics) segment with high level of regulatory risk. Acuité
expects the sector risk profile to deteriorate marginally due to an expected reduction in
volumes and realizations in the plastic segment.
Power (Renewable): Moderate to Low Risk
Power Generation (Renewable) has witnessed a favourable operating environment due to
improving asset utilization and firm government support to green energy. Nevertheless,
there are emerging concerns on the availability of land for large renewable projects, timely
project completion, lack of grid connectivity and risks of tariff negotiation by distribution
companies in the context of a sharp drop in new project tariffs. .

22 23
Acuité Ratings & Research India Credit Risk Yearbook-2019

T E L ECO M M U N I C AT I O N S Industry background and characteristics


India is currently the world’s second-largest telecommunications market and has second
highest number of internet users in the world with a subscriber base of 1.19 billion. Telecom
sector includes 3 segments – Mobile(Wireless), Fixed-Line(Wireline) & internet services.

During the first quarter of 2018, India became the world’s fastest-growing market for mobile
applications. The country remained as the world’s fastest growing market for Google Play

Composition of Telephone Subscribers downloads in the second and third quar-


ter of 2018. The government has enabled
0%
2%
easy market access to telecom equip-
ment and a fair and proactive regulatory
framework that has ensured availability of
telecom services to consumer at afford-
able prices. The deregulation of Foreign
44% 54%
Direct Investment (FDI) norms has made
the sector one of the fastest growing and
a top five employment opportunity gener-
ator in the country. Consolidation has left
Urban wireless Rural Wireless the industries with a few key major play-
Urban wireline Rural wireline ers viz. Vodafone Idea, Bharti Airtel, Reli-
ance Jio Infocomm, BSNL, MTNL etc.
Source: Ministry of Telecome

Rating distribution: 67% of portfolio is investment grade

21% 21%

Upgraded: 9.3%

Risk category: High MCR:


Downgraded: 4.7%
12%
1.08
Telecommunications industry is in high stress owing to plunging revenue and profitability amid
continuing tariff wars. The debt levels have increased continuously as the companies used 9%
borrowed funds to pay high spectrum & license fees. The industry is saddled with almost Rs.8 Default: 21%
lakh Cr. of debt. Government has amended various norms with respect to spectrum & license 2%
with an effort to boost the health of the industry.
A BBB BB B D

Source: Acuité Research, CMIE

2/3rd of the total portfolio is in investment grade. Default Category consists majorly cellular mo-
bile phone service & wireless services. MCR is quite good indicating more upgrades than down-
grades. Companies upgraded are now into investment grade category indicating lower risk.

24 25
Acuité Ratings & Research India Credit Risk Yearbook-2019

Increasing subscriber base but falling revenues for Avg. Revenue Per User (`)
Earlier, the operators had to purchase spec-
trum from the government by participating in
telecom companies an auction, where the reserve price was kept
125 126 substantially high. Further, new spectrum
121
had to be purchased with the launch of 2G,
Sales (` in Crores) Growth in Sales Total Subscriber Base 104
(No’s in million)
% increase Subscriber
83 80 84
3G & 4G services.
79 76
69
250000 29% 35%
1500 1195
They had to take substantial loans to be able
15%
191347 187615
181574
30%
1059 1206 to afford the licenses. However, these licens-
200000
147771 25% 996
-13% es have been rationalized and are linked to
130945 20% 1000 933 10% the adjusted gross revenue earned by the
150000 7% 6%
operators.

Mar-16

Jul-16

Jan-17
Mar-17

Jul-17

Jan-18
Mar-18
May-16

Sep-16
Nov-16

May-17

Sep-17
Nov-17

May-18
15%
13%
100000 10%
500 5%
With 70 per cent of the population staying
5% 5% 4%
Source: Acuité Research, CMIE in rural areas and a telecom penetration of
50000
0% 58.61 per cent as of august 2018, the rural
-2% -3% 1%
0 -5% 0 0% market would be a key growth driver in the
FY14 FY15 FY16 FY17 FY18 2013-14 2014-15 2015-16 2016-17 2017-18 coming years.

Source: Acuité Research, CMIE


Source: Acuité Research, CMIE 10-player market to a 3-player one…
The price war post launch of Reliance Jio, put pressure on the margins earned by the
During FY07-18, total subscriptions in the country increased at a CAGR of 15 per cent, with operators leading them to consolidate the market & gain advantages arising from econ-
the number of subscribers reaching 1206 million in FY18. Out of the total, 1193 million are omies of scale. Airtel acquired Tata Teleservices while Vodafone India & Idea merged into
wireless subscribers. Major reasons for the increase include affordable smartphones, low Vodafone Idea to become the largest telecom company in India by market share. Most of
call & data tariffs, rural penetration, increased use of internet for work, social media, vari- the small regional players have either sold their business to the large operators or have
ous applications etc. become bankrupt.
Total broadband subscriptions in the country increased at a CAGR of 60 % during FY07–18
to reach 412.6 million. Subscriptions stood at 463.7 million, as of August 2018. Govt policies aimed towards increasing internet penetration in the
The number of internet subscribers in the country grew at a CAGR of 42.7 per cent during country
FY06-FY18 to reach about 494 million in 2017-18. Internet subscriptions in India surpassed
the 500-million mark to reach 512.26 million by the end of June 2018. The number of internet The Government of India has come out with a new National Telecom Policy 2018 in lieu of
subscribers in the country is expected to double by 2021 to 829 million. rapid technological advancement in the sector over the past few years. The policy has
envisaged attracting investments worth US$ 100 billion in the sector by 2022.
Mobile phones have become a necessity, as it is evident that tele-density i.e. number of tele-
phone connections for every 100 individuals, grew from 18.23 per cent in FY07 to 92.84 per Under NDCP (National Digital Communications Policy) 2018, the government plans to opti-
cent in FY18. In FY18, tele-density number in urban areas is around 165 due to increasing use mally price spectrum, review levies such as license fees and spectrum usage charges while
of dual sim cards while in rural areas it is close to 60. also taking a fresh look at spectrum sharing, leasing and trading guidelines.
The Department of Information Technology intends to set up over 1 million internet-enabled
common service centers across India as per the National e-Governance Plan.
Advent of Jio created disruption in a mature industry
FDI cap in the telecom sector has been increased to 100 per cent from 74 per cent; out of
Although, number of subscribers is on increase, revenues have been dipping for telecom com- 100 per cent, 49 per cent will be done through automatic route and the rest will be done
panies from September 2016. Average revenue per user have declined 43% from Rs.121 in Sep- through the FIPB approval route. FDI of up to 100 per cent is permitted for infrastructure
tember 2016 to Rs.69 in June, 2018. This was solely because of Reliance Jio and its aggressive providers offering dark fiber, electronic mail and voice mail.
pricing strategy for rapid market penetration. This resulted in other telcos offering attractive
The Government of India has introduced Digital India program under which all the sectors
low cost plans to retain their market share. This has led to decrease in revenues industry wide.
such as healthcare, retail, etc. will be connected through internet. There are over 62,443
Average revenue per user is set to recover upto 5% in FY19 as Reliance Jio is expected to uncovered villages in India; these would be provided with village telephone facility with
pursue a less aggressive strategy by reducing discounts. Further, there is lot of potential for subsidy support from the government’s Universal Service Obligation Fund (thereby increas-
mobile operators to increase their revenue by offering value added services. Going forward, ing rural tele-density).
revenue numbers are expected to improve.

26 27
Acuité Ratings & Research India Credit Risk Yearbook-2019

Further decline in profitability expected in the short run Increasing debt levels & deteriorating debt protection
Net Profile Margin Operating Margins RoCE
matrices
17% Gearing ICR NCA/TOTAL DEBT
15%
43% 13%
42%
37% 1.04
0.98 4.09 4.07
27% 7% 1.08
0.74
17% 4% 0.75 2.77
12%
9%
4% 1.68
1.17
-10% -21% 2013-14 2014-15 2015-16 2016-17 2017-18 0.36 0.31 0.24 0.14 0.09
2013-14 2014-15 2015-16 2016-17 2017-18

2013-14 2014-15 2015-16 2016-17 2017-18 2013-14 2014-15 2015-16 2016-17 2017-18
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
With the entry of Reliance Jio in September 2016, profitability in the industry dipped substan- Short & long-term borrowings have been continuously increasing year on year. This has
tially in FY17. Operating margins are reducing consistently while net profit margins have turned caused gearing levels to move upwards. Reducing profitability & increasing debt in the sector
negative. The Jio effect continued in FY18 as well. Although operating costs were reduced to has caused debt protection matrices to decline. The growth in borrowings is expected to de-
certain extent due to spectrum sharing & tower sharing, profitability could not sustain due to cline over the medium term as profitability pressures ease.
declining revenues. This erosion of wealth is expected to continue in the short run.

Suboptimal liquidity profile despite lower working capital


Dismal equity returns of the sector requirements
Telecom Returns Sensex Returns Index PB (Times)
Liquidity profile is currently suboptimal. Net Debtors Days Creditors Day
cash accruals to total revenue in the sector Inventory Days Cash Conversion Cycle

2.03
have declined significantly from 30% in FY15
99
1.79 to 2% in FY18. The short term debt to total 89
1.87 debt in the sector was 22% in FY18 from 12% 74
66 71
1.72
1.63 in FY15. The current ratios in the sector was
low and ranged between 0.39 to 0.69 over -29
-36
the past 5 years. 43
-43 34
The cash conversion cycle of the sector is 36 34
30
Ju 8

Se 8

O 8

18
M 8
Fe 8

Ap 8

2013-14 2014-15 2015-16 2016-17 2017-18


De 8
M 8

No 8
Ju 8
Au 8
1

1
r1
1

1
1

1
1

on a declining trend from -28 days in FY14 -55


l1
ay

-56
n

ar

v
b

ct
n
Ja

2 2 1 1
to -56 days, it is mainly driven by stretched 0
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
creditor payment due to liquidity issues, FY14 FY15 FY16 FY17 FY18
which increased from 66 days in FY14 to 99
In 2018, Telecom index dipped drastically by 41% while SENSEX rose by 6%. This was on ac- days in FY18. We expect the liquidity pro- Source: Acuité Research, CMIE
count of worsening condition of telecom companies in terms of declining sales, liquidity stress, file and cash conversion cycle to remain
reducing profitability, price war amongst large players etc. stressed over the medium term.

Key Monitorables
¡¡ Content through collaborations and partnerships for added revenues

¡¡ Introduction of 5G

¡¡ Innovations for better Utilisation of existing spectrum

28 29
Acuité Ratings & Research India Credit Risk Yearbook-2019

R E A L E S TAT E Industry background and characteristics


Real estate sector comprises of housing, retail, commercial & Hospitality. The construction
industry ranks third among the 14 major sectors in terms of direct and indirect impact on the
economy. Real estate sector has a market size of about US$ 120 billion as of 2017 currently
contributes to about 10-11 per cent of the country’s GDP. The growth of this sector is well com-
plemented by the growth of the demand for commercial spaces for corporate offices, brick
and mortar stores as well as urban and semi-urban accommodations.

In the housing segment, the industry dynamics vary significantly between cities especially in
local regulations, market proposition, apartment sizes, customer preferences, a n d
paying capacity. Due to this, developers tend to expand within cities and work on different
operating models across geographies. The commercial segment meanwhile is slightly more or-
ganised. It involves construction of office spaces dominant mainly in IT/ ITES and BFSI industries
majorly in the metros.

The risk in commercial real estate is higher as the projects are funded majorly by promoters’
contribution and leverage, contrary to residential properties where a chunk of funding comes
from pre-construction booking advances of customers.

Rating distribution: 54% of portfolio is investment grade

26%
Upgraded: 3.3%
21%
18%
16%
MCR:
Downgraded: 8.2% 0.91
8% 8%

2% Default: 16.4%

AAA AA A BBB BB B D

Risk category: High Source: Acuité Research, CMIE

Credit ratings of Real Estate companies are skewed with 54% of portfolio in investment grade
The sector is in visible stress as profitability and debt protection metrics are at low levels and while 16.4% of the portfolio is in default. 90% of default cases comprise Housing Real Estate
have seen a declining trend, which is unlikely to reverse in the near term. Players in the res- segment. 50% of downgrades belong to housing segment whereas other 50% belong to com-
idential housing segment have been facing more challenges vis-a-vis the commercial space. mercial. Only the entities present in housing segment have seen upgrades.
Steady commercial real-estate space demand, the tax benefit announcements in the interim
budget 2019 and the policy push in terms of REITs, PMAY, etc. should provide some respite to
the sector over the medium term.

30 31
Acuité Ratings & Research India Credit Risk Yearbook-2019

Real estate reeling under the slew of reforms and Except for Delhi, prices saw a constant rise across metros until FY17. With the exception of
Mumbai and Pune, prices in most of the metro & tier I cities have declined post demonetisation
declining demand period. Demand in commercial real estate segment has seen significant growth.

Sales growth has been declining post Demand for commercial offices saw an uptick in FY18 because of higher industrial activity
Revenues (Rs Cr) Growth
and corporate expansion. Growth was contributed by tieri & tierii cities too. The increased
12000 20% demonetisation in November 2016. The investment in the commercial real estate by domestic & foreign companies is confirmation of
16% 15%
15%
effect of reduced demand in FY18 has the robust office demand in India The demand has remained volatile over the last few years.
10000 9528
11% 9174 9109
7969 been partially offset by increase in af- Demand in 2018 for large office leasing rose 35% from the previous year. Owing to increased
8000 10%
6874 fordable housing segment. Demand in demand, large cities in India are expected to report 40-45 million sq. ft. of absorption which
6000 4% 5%
housing segment is recovering, but at a is an all-time high. The incremental supply this year is expected to hit a high of approx. 30
million sq. ft. so demand will outstrip supply.
4000 0% snail’s pace as buyers continue to wait
for further downward price corrections.
2000 -4% -5%
Despite gradual decline, inventory levels remain high across major
Most states are not yet in accord with
0 -10%
cities
FY14 FY15 FY16 FY17 FY18 Central RERA.
Currently, there is an oversupply situation in the real estate housing sector. There is huge
Source: Acuité Research, CMIE inventory pile-up at developer’s end. This inventory mostly consists of mid-category, luxury
Further, liquidity crisis amongst the sector players have raised concerns on non-delivery of and premium-housing projects. Currently, at the moment the demand is far more for afford-
under construction projects among potential buyers. Therefore, a significant improvement able housing segment. Affordable housing accounted for significant share of supply with
over 41% of the new supply coming into this category. Overall, supply is down by 22% as
in demand would be farfetched to expect over the short term. Reduction in GST for houses
compared to previous year. Liquidity crunch and unsold stocks have restricted new supply.
bought under CLSS (from 12% to 8%) should, however, provide some impetus.
Total Investments of Rs. 5,16,242 Crores in Commercial Complexes Industry were outstand-
PM affordable housing scheme has contributed to significant push in demand in the housing ing as on March 31, 2018 out of which 48% are under implementation at the expected pace
segment. Combination of drop in new launches and improvement in sales has brought down & 9% are stalled projects.
inventory overhang to the lowest in the past five years. Currently, there is only 29 months of
unsold inventory at aggregate level of the top nine cities in India. In the short term, the sales Regulatory and policy overhaul in the last two years have brought
are further expected to increase. Aggregate of new orders received by housing construction structural changes to the sector
companies amounted to Rs. 18,388 Crore in FY18.
Implementation of GST and RERA have created an environment conducive for formalisation
of the sector.
All-India House Price Index (FY 11 to FY 18) Price Index of Top 9 Cities of India
Under the Pradhan Mantri Awas Yojana (PMAY) Urban, more than 6.85 million houses have
been sanctioned up to December 2018. In February 2018, creation of National Urban Hous-
Delhi Mumbai Kolkata Chennai
India house price index % Rise in Price ing Fund was approved with an outlay of Rs. 60,000 crore (US$ 9.27 billion). Both have
Bengaluru Pune Hyderabad
300 25% provided added impetus to the sector.
24% 23% 255 150
250 237 20%
199
219 After extensive budgetary interventions and rework from SEBI in consultation with indus-
200
171 16% 15% 130 try-experts have fine-tuned the REIT to match industry expectations. This is a great step in
152
150 124 13% early monetization for developers and thus reducing the stress in the sector.
100 10%
100 10%
8% 8% 110
5%
50

0 0% 90
2013-14 2014-15 2015-16 2016-17 2017-18
-11

12

-13

-14

-15

-16

-17

-18
11-
10

16
12

14
13

15

17
20

20

20

20
20

20

20

20

Source: Acuité Research RBI Index, CMIE Source: Acuité Research RBI Index, CMIE

32 33
Acuité Ratings & Research India Credit Risk Yearbook-2019

Profitability has been on a declining trend Stretched creditor days indicate stressed liquidity in the
ROCE
near term
Operating Margin Net margin
13%
25% 22%
12% 12% 11% 11% Net cash accruals to total revenue in the sector have declined significantly from 13% in FY14 to
23%
20% 3% in FY18. The dependency on short term debt in the sector has increased overtime. On an
20% 19%
19% average, 84% of the total borrowings of the industry were short term indicating need for high
15% liquidity in the sector. The current ratios in the sector were moderate and ranged between
10% 9% 9% 1.6-1.8 over the past 5 years.
7%
Debtors Days Creditors Day
5% 5% The cash conversion cycle of the sector
Inventory Days Cash Conversion Cycle
3% is on a declining trend from 43 days in
0%
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 FY14 to -49 days, it is mainly driven by
191
stretched creditor days, which increased 43

Source: Acuité Research, CMIE Source: Acuité Research, CMIE from 84 days in FY14 to 191 days in FY18. 26
3 11 13
We expect the liquidity profile and cash 3 7 10
9
ROCE & profitability margins have been decreasing on account of reduced demand & de- conversion cycle to remain stressed in 124 123
112
137 128
crease in prices in housing segment. Further, increase in operating expenses has led to re- 109
the near term. 100 117
duced margins. 85 -49

Debt protection metrics seeing decline despite stable and FY 14 FY 15 FY 16 FY 17 FY 18

healthy gearing levels Source: Acuité Research, CMIE

Equity performance of the sector has remained sub-par


ICR NCA/Total Debt
2.5 25%
1.9 2.1 Real Estate Sensex
Sensex has outperformed real estate
D/E Ratio 1.9
2.0 20% index. In 2018, real estate index dipped
16% 1.6
15% by more than 50% due to low demand,
0.6 1.5 15%
0.6 0.6
0.5
12%
1.3 declining profitability, liquidity crunch
0.5 12%
1.0 10% and supply overhang.
0.5 6% 5%

0.0 0%
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

18

18
18
18

18
18

Se 8
8
-18
M 8
18

-18
1
l-1
1
n-

c-
v-
b-

p-
n-

g-
r-
ar

ay

ct
Ju
Ap

De
No
Ja

Ju
Fe

Au

O
M
Housing segment is relatively more leveraged than the commercial segment because of de-
clining cash accruals & increased borrowing. High inventories in the commercial segment has Source: Acuité Research, CMIE
led developers to have a cautious approach for further debt funded capex.
Increased borrowing in the housing segment & declining profitability are the major reason for Key Monitorables
declining interest coverage ratio. Real estate sector is facing liquidity crunch as there have
been low cash accruals. The impact of liquidity crunch can be seen in FY18 (after demoneti- ¡¡ Real estate sector could face liquidity issues going ahead
sation) where NCA/total debt has fallen by almost 50% from FY17.
¡¡ Unsold retail inventory in top cities.

¡¡ Utilisation of REITS

34 35
Acuité Ratings & Research India Credit Risk Yearbook-2019

P OW E R - CO N V E N T I O N A L Industry background and characteristics


Conventional Electricity is the major source of the India’s total power generation with installed
capacity of 275 GW out of total capacity of 347 GW as on November 2018. Of this, about
a third came from private generation entities. Electricity generated by conventional power
generation clocked 1206 billion kWh in FY18, reporting growth of 4.0%. Conventional power
generation constitutes of

¡¡ Thermal Electricity Power Generation

- Coal-Based Power Generation


- Gas-Based Power Generation

- Diesel-Based Power Generation

¡¡ Hydro Electricity Power Generation

¡¡ Nuclear Electricity Power Generation.


India has witnessed tremendous growth in electricity generation in the last decade to meet
the fast growing energy demand. India has added 143 GW of conventional electricity gen-
eration capacity in last 10 years, grown at CAGR of 7.6%.

Rating distribution: 62.7% of portfolio is investment grade

26.1%
24.6% Upgraded: 10.6%

16.9% 16.2%
MCR:
Downgraded: 12.7%
1.00
6.3%
4.9% 4.2%

Risk category: Moderate to High 0.7% Default: 26.1%

AAA/A1+ AA A BBB BB B C D

Power Generation (Conventional) is under pressure because of below average plant load fac- Source: Ministry of Power
tor, liquidity issues arising from continuing payment delays from state utilities, tariff disputes,
increasingly cheaper supplies from Renewable Energy Sources and low demand growth due Credit ratings of Power Generation (Conventional) companies are highly skewed with
to lower than expected pick up in manufacturing sector. Acuité expects the stress level in the
sector to remain given the lack of availability of cheap domestic coal and natural gas for about 63% of portfolio in Investment grade, while 26 % of portfolio is in default.
thermal power plants and payment risks from weak distribution companies.
Gas-Thermal Power plant has highest level of defaults of 31.3%, however all the non-de-
However, given that more than two thirds of the generation entities are govt. backed, the fault companies in this segment are in Investment grade. Coal-Thermal Power Plants also
stress for the overall sector is mitigated. Of the third of the installed capacity, i.e. about 40
GW is estimated to be under financial stress. have above industry average defaults of 29.5%. Only 57.4% of this segment portfolio are
in Investment grade. Hydroelectric plants have default rate of 23.8%, with 52.4% of port-
folio in investment grade, also hydroelectricity is the only segment with MCR ratio of more
than 1 (MCR of 1.08).

36 37
Acuité Ratings & Research India Credit Risk Yearbook-2019

Supply to outstrip the future demand for the electricity, Revenues seeing an uptick as Utilisation levels and tariffs both see improvement

with electricity demand to grow at CAGR 5-5.5% in next Net Sales (Rs. Cr) Growth Conventional Power Generation (bn kWh)

5 years. 200000 190181 10.0% 1400


Growth
8.4% 9%
162340 171843 174903 1160 1206 8%
8.7% 1200 1107
149195 8.8% 8.0% 1048 7%
Power deficit (demand-supply gap) has greatly reduced FY 2016-17 deficit and was lowest in 150000
7.0%
1000 912
967
6.0% 6%
5.6%
the last two decades with normal deficit at 2.1%. However, significant capacity additions have 100000
5.9% 6.0% 800 4.8% 5%
bought it down to 0.7% in FY18. In terms of state-wise deficit, Eastern states experienced the 4.0% 600 4.0%
4.0%
4%
3%
400
most deficits due to lack of robust grid and transmission network have been major hindrance 50000
1.8% 2.0% 2%
200
for power supplies in these states. 1%
0 0.0% 0 0%
FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18
States with high level of Power deficit in FY18
Source: Acuité Research, CMIE Source: Acuité Research, CMIE

State Deficit (%) The demand grew at a respectable 5.8% CAGR over the last 5 years, driven by increased
Jammu & Kashmir -20 power generation from coal-based thermal power plants (7.6% CAGR). This was mainly
due to significant capacity additions. Meanwhile, gas-based thermal power plants have
Jharkhand -1.75
witnessed significant drop in power generation due to reduced natural gas allocation.
Bihar -1.52 Hydro electricity generation too remained stagnant due to lower reservoir levels.
Uttar Pradesh -1.46 Consequently, the sector witnessed revenue growth of 6.2% CAGR over the last 4 years.
Arunachal Pradesh -1.25 This growth was driven by capacity additions of coal-based power plants. However,
during the same period, efficiency of coal-power plants had declined as the PLF dropped
Rajasthan -0.83 to 60.5% in FY18 from 65.5% in FY13, resulting in revenue growth being lower than capacity
addition growth. The sharp decline in revenue growth in FY 16 and 17 was majorly driven
Source: Acuité Research, CMIE by a sharp 250bps decline in PLF in coal-power plant.
Financial health of Discoms is a key factor for growth in electricity demand. UDAY scheme
Deficit has seen a declining trend
launched to turnaround loss making discoms has issued Rs. 2.32 Trillion (86.3% of Target
10% We expect power generation to grow at issue) worth of bonds. AT&C loss has dropped to 21%. Out of 27 UDAY states, 25 states
9.0% Demand Unmet
have undertaken price revision. Discoms have shown signs of recovery in financial perfor-
Peak Demand Unmet CAGR of 6-6.5% in next 5 years on account
8% 8.7% mance. Add to this, the faster movement in the rural electrification scheme would provide
of significant expected additions from Rural further impetus.
6%
electrification scheme (RES). Furthermore,
4.5% 4.7% thermal power plants have shown signs of Pace of capacity additions expected to slow down going ahead
4% 4.2% 3.6% 3.2% recovery with PLF improved to 61.1% in 2018- as well
1.6% 2.0%
19 (Up-to Oct). Growth in capacity additions has seen a downturn
2%
2.1%
0.7% 0.7% Capacity addition growth by Conven-
0% tional sources stood at 5.4GW in FY18, Conventional Capacity (GW) Growth
FY13 FY14 FY15 FY16 FY17 FY18 lowest level in the decade. The sector 300 13.0% 14%
270 275
is facing major threat from renewables 12.2% 259
12%
Source: Ministry of Power with capacity additions to the tune of 250 236
214
11.8 GW, during the same period. Over 200
197 10.5% 9.9%
10%
175
last 3-4 years renewable energy sourc- 8.5% 8%
es share in total installed capacity is 150
6%
increasing with share of 20.1% in FY18.
100
4%
4.0%
Plant Load Factor (PLF) of thermal
50
power plants had improved to 60.7% 2.0% 2%
in FY18 from 59.8% in FY17. However, 0 0%
PLF remained at below 10-year aver- 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
age of 69.5%.
Source: Acuité Research, CMIE
38 39
Acuité Ratings & Research India Credit Risk Yearbook-2019

PLF has shown the sign of improvement, yet remains below 10-year average Profitability expected to see an improvement backed by
Coal-Based Gas-Based Total Thermal higher demand and lower input costs
69.9 70.1
65.5 65.6 63.9 64.3
Margins saw a decline over the last two years majorly due to higher input costs
62.1 62.2 59.6 59.8 60.5 60.7

Net Sales (Rs. Cr) Growth Conventional Power Generation (bn kWh)
40.3 Growth
200000 190181 10.0% 1400 9%
162340 171843 174903 8.4% 1206
24.9 1160 8%
20.8 22.5 22.5 22.9 8.7% 1200 1107
149195 8.8% 8.0% 1048 7%
150000 1000 967
7.0% 912 6.0% 6%
5.6%
5.9% 6.0% 800 4.8% 5%
100000
4.0% 600 4.0% 4%
2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 4.0% 3%
50000 400
2.0% 2%
1.8% 200 1%
0 0.0% 0 0%
Source: Acuité Research, CMIE FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18

Fuel supply challenges to be resolved backed by policy initiatives Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Lack of fuel supplies is affecting the performance of thermal power plant. As on 31 March, Gas-Thermal power plants have witnessed healthy growth in Profitability over the last 5 years,
2018, 24.6% of power plants were critical in coal supplies. In FY18, power utilities have re- EBITDA margin has steadily improved from 24.7% in FY14 to 33.2% in FY18 with RoCE improving
ported generation loss of 15.2 BU due to coal shortage. to 14.0% in FY18 from 9.8% in FY14.
Also, Gas based thermal power plants also have been facing the lack of allocation of Natural Hydro-electric plants have the highest profitability metrics in the industry with EBITDA margin
gas. Consumption of Natural Gas by Power utilities stood at 12.0 bcm (22.8% of total natural and PAT margin of 58.7% and 21.7% respectively in FY18 because of lower fuel cost, RoCE
gas consumption in the country) in FY18 as against its peak consumption of 23.6 bcm in 2010- stood above industry average at 8.5% in FY18 in spite of highly capital-intensive nature of
11 (46.2% of total natural gas consumption in the country). business and cyclical nature of power generation.
Inadequate railway infrastructure and rake availability has been affecting availability of do- Lack of availability of domestic coal due to mining issues drove many power plants to import
mestic coal. Going forward, availability of domestic coal and natural gas would remain the high cost coal, which adversely affected their profitability post FY 16. EBITDA margins dropped
driving factor for PLF. to 29.3% in FY18 as against 34.6% in FY16 and RoCE also dropped to 6.8% in FY18 as against
8.9% in FY16. This is expected to improve going ahead.
Govt initiatives will continue to bear fruit and ease challenges over
the medium term Increasing leverage levels and reducing profitability have
resulted in deterioration in debt protection metrics
Several measures have been initiated by the govt. to alleviate issues in the sector. Prominent D/E ICR NCA/Total Debt
amongst them is the Scheme for Harnessing and Allocating Koyala Transparently in India 9.3%
9.0%
(SHAKTI). Launched in May 2017, it targets resolving fuel supply bottlenecks by ensuring avail- 8.8%
3.6 0.20
7.8%
ability of coal to thermal power plants based on action or tariff based bidding. Private players 7.5%
3.4
3.4 3.4
0.15
are ensured with availability of coal, especially distressed ones. This has resulted in several 0.14 0.15
3.2 0.15 0.14 0.12
thermal power plants witnessing improved PLFs.
3.0 3.1 0.10
3.0
The flexible coal utilisation policy notified earlier in May 2016 has brought down fuel costs too 2.8 2.9
0.05
due to improved coal supply and quality. 2.6

Saubhagya scheme launched in September on ensuring 100% electrification of 32.1 million 2.4 0.00
FY14 FY15 FY16 FY17 FY18
un-electrified households by 2018, with 95% of the target achieved by 2018. FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

The sectors gearing has increased to 1.01 times in FY18, mainly driven by Coal-based thermal
power plants with D/E ratio jumped from 0.90 times in FY14 to 1.14 times in FY18. Debt levels in
Coal-based thermal power plants have grown at a 9% CAGR over the last 5 years. This was
majorly due to higher debt funded capex given the lower levels of Net cash accruals. This trend
is expected to reverse over the long term.
40 41
Acuité Ratings & Research India Credit Risk Yearbook-2019

Contrary to that, Hydro-power plants have witnessed improvement in leverage level, with D/E Sector valuation has remained range bound over the last 5 years
dropping to 0.66times in FY18 as against 0.89times in FY14, mainly on account of improving op-
erating efficiency, declining new debt funded capex in this segment.
Index PE Times Index PB Times
Power Generation- Convention-
Interest coverage ratio has been steadily declining on account of operating inefficiency and 1.4 18
16.3 al has underperformed broader
rising cost of raw material due to lack of low cost domestic fuel supplies. NCA/Debt is also de- 1.2 15.7 16
1.2 15.2 market in 2018. Trailing P/E stood
clining steadily mainly due to declining cash accruals from Coal based power plants, NCA/debt 14.1 14.0 1.2
13.2 1.1 1.1
14 at moderate levels, around 16
of coal power plants has declined to 0.10 times in FY18 against 0.13 times. 1.0
1.0 1.0 12 times in FY18. The index is trading
0.8 10 at just above the book value, ma-
Improving WC cycle on the back of lower cash accruals 0.6 8
6
jorly due to stress in the sector,
lack of availability of coal, fear of
0.4
4 overcapacity & lower price real-
0.2
The industry has stressed liquidity pro- 2 isation have primarily led the in-
Debtors Days Creditors Day
0.0 0 dex to underperform the market.
Inventory Days Cash Conversion Cycle file. The cash conversion cycle of the sec- 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
tor has remained healthy between 30-50
68 66 67
days over the past 5 years and is main- Source: Acuité Research, CMIE
60 64
59
62 63 ly driven by debtor conversion cycle that
ranged between 60-70 days over the past
Key Monitorables
59 58
50
45 5 years, owing to delays in collection from
41
45 39 government agencies. Further, low inven- ¡¡ Availability of fresh power purchase agreements and amendments in existing PPA
43
33 38 tory levels, due to in availability of stock, tariffs
35
33 has decreased the overall cash conversion
cycle. The current ratios in the sector were ¡¡ Ministry of power has mandated discoms to purchase 21% of power purchased from
FY 14 FY 15 FY 16 FY 17 FY 18
below average and remained below 1 over renewable sources, compared to target of 17% in FY19. However, enforceability re-
the past 5 years. mains the key issue. Going forward, how discoms comply with the targets will be key
Source: Acuité Research, CMIE
monitorable.
We expect the cash conversion cycle and overall liquidity in the segment to remain stressed ¡¡ Government has set target of 175 GW of Renewable Energy Sources (RES) by 2022
in the medium term. while installed capacity of RES stood at 72 GW as June, 2018. At the current pace, RES
is expected to grow to 30-35% of Installed capacity by 2022. How does the growth in
Sector under-performed broader market in the last RES impacts supply and demand will be key monitorable.
12 months
Index Return BSE 500 Return
Ap 18
M 18

Ju 18
Au 18
Fe 18
M 18

Ju 18

Se 18
O 18
No 18
De 18
18
Au 17
Se 17
O 17
No 17
De 17
Ja 17
n-

r-

n-
l-
b-

g-
p-

-
v-
c-
l-
g-

-
v-
c-

ar

ay

ct
p
ct
Ju

Source: Acuité Research, CMIE

42 43
Acuité Ratings & Research India Credit Risk Yearbook-2019

S U GA R Industry background and characteristics


Sugar is the second largest agro-based industry in India after cotton, with more than 50
million sugarcane farmers and 0.5 million-sugar mill workers depending on it for their live-
lihood. India is the largest consumer of sugar worldwide with around 26 million tonnes per
annum (MTPA) and the second largest producer at more than 30 MTPA, accounting for
around 15% of the global production. The industry stood at an estimated Rs. 80,000 crore
as of FY18.

The top 3 states, Uttar Pradesh, Maharashtra, Karnataka, contribute to about 74% of total
production.
The domestic industry is highly com-
petitive and fragmented with 493 mills
operational in FY17. Some of the major
companies operating in this sector are
20% Uttar Pradesh
Shree Renuka Sugars Ltd., Balrampur
Maharashtra
Chini Mills Ltd., Bajaj HIndusthan Sugar
6% 42%% Karnataka Ltd., Dhampur Sugar Mills Ltd., amongst
Tamil Nadu others.
11%
Others Sugar industry is subject to high regula-
21% tory risks, since it is controlled by both
state and central government regula-
tions in terms of allocation of sugarcane,
Source: Acuité Research, CMIE cane pricing and by-product pricing.

The government provides support through subsidies, soft loans during cyclical downturns
and stock and price control measures, populist measures toward sugarcane farmers under-
mining the overall support to the sugar industry. With regards to marketing and distribution
of sugar (levy and release mechanism), government has recently implemented measures like
stock holding limits, introduction of floor prices for retail sugar sales among others with a

Risk category: Moderate to High view to ease the pricing pressure.

Rating distribution: 53% of portfolio is investment grade


Sugar sector is currently challenged due to high cane procurement costs and therefore
highly volatile profitability and high inventory levels in the industry arising from an oversup-
ply scenario. While Government intervention in the sector through export facilitation etc. 23.3% Upgraded: 3.3%
23%
happens from time to time, it may not provide adequate respite to the sector.
20%

MCR:
13% Downgraded: 10.0%
0.92
10%
7%

3% Default: 23.3%

AA A BBB BB B C D

Source: Acuité Research, CMIE

44 45
Acuité Ratings & Research India Credit Risk Yearbook-2019

Credit ratings of Sugar sector companies are moderately skewed with about 53% of port- Sugar mills with large scale of operations, sufficient cane availability and better forward
folio is in Investment grade, while 23% of portfolio is in default grade. The sugar sector saw integration in terms of ethanol/alcohol production from molasses and power co-genera-
a downfall in in 2016-17, production declined sharply owing to drought like conditions in key tion through bagasse, are better positioned to weather cyclical downturns.
sugarcane producing states, especially, Maharashtra and Karnataka, resulting in higher de-
Acuité believes that though demand is likely to remain steady, production glut, both do-
fault rates in the segment.
mestically and globally, will put downward pressure on sugar prices and render exports
unviable. Lower sugar realisations are likely to have a negative impact on profitability
Domestic demand is expected to remain robust; supply of the industry.
is likely to outpace demand Pace of capacity additions expected to slowdown going ahead
Supply glut to outpace the future demand
Capacity additions in the sugar sector has increased at a slow pace (FY13-18), capacity
Utilisation has been low
Revenue in '000 Crore % Growth in Revenue Domestic Demand '000 Tons
% Growth in Demand Domestic
50 30 35 25 Due to low output of cane Capacity util-
Capacity Addition (’000 TM) Capacity Utilisation %
25 30 isations saw a drop from FY 15 to FY 17
39 40 30 20
40
26 600 100%
34
20
25 24 25 25 541 and consequently the industry saw mini-
31 32 24.1 23 15
15 20.9 86% 92%
30
20 500 mal capacity additions during the period
10 10 80%
20 15 7.3 400 79%
75% too. Capacity additions were the highest
5 4.7 76%
0.1 10
5 by 28% in FY13, after which has paced
1.4 1.8 0 300
10 60%
-6.9 -5 5 -2.7 0 61% low between 1-2%.
0.7 0.1
-10 -5 200
0 0
FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18 E 40% However, production peaked in FY 18 with
100
33 48 37 34 41 capacity Utilisation reaching higher than
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
0 20% 90% which put down ward pressure on
FY13 FY13 FY15 FY16 FY17 FY18
Domestic demand is largely steady and growing, driven by rising consumption in sectors such as the prices .Sugar production in the 2018-
confectionaries, sweets and soft drinks, which comprise almost 65% of the total consumption of Source: Acuité Research, CMIE 19 India has produced 7.1 million tonnes
sugar, while rest of the demand comes from retail consumers. Surplus production in the European
of sugar till 15 December 2018 in the ongoing sugar season 2018-19, as per data released
Union (EU), Thailand, and China in FY 18 has led to a decline in prices globally. Indian sugar exports
by Indian Sugar Mills Association (ISMA). This is higher by 2.1 per cent as compared to same
are expected to fall short of their target due to strengthening rupee and low international prices
period of previous year. This growth in production is on account of early commencement of
of sugar. Sugar mills are expected to export 2.5 - 3.5 million tonnes of sugar in the FY19 against
crushing operations in the sugar mills in Maharashtra and Karnataka and good monsoon
the target of five million tonnes. This is expected to have an adverse impact on the profitability
year in FY18.
of the industry in the medium term.
However, ISMA has lowered the country’s production estimate to 31.5 MT, lower than early es-
Higher acreage, good monsoon, input cane prices play a crucial timates of 35MT on account of Adverse impact of untimely rainfall, water logging and disease
role in the production of sugar in UP, Karnataka and Maharashtra. This is expected to lower the rising inventory levels in the
industry and bring some respite to manufacturers.
The industry is highly cyclical in nature. In Sugar season 2014-15, surplus production of sugar
owing to higher acreage under cultivation backed by good monsoon in 2013 led to a down- Govt measures to see help stabilize the industry in the short term
ward pressure on prices. Conversely, in Sugar season 2016-17, production declined sharply
owing to drought like conditions in key sugarcane producing states, especially, Maharashtra
The industry is highly regulated in terms of allocation of sugarcane, cane pricing and by-prod-
and Karnataka.
uct pricing. The central government regulates FRP for sugarcane, and levies import-export
Going forward, in SS 2018-19, surplus production, owing to higher area under cultivation of
sugarcane backed by consequent good monsoons in 2017 and 2018 and lucrative cane pric- duty to maintain sugar availability in the country. State governments also determine their own
es. Initial estimates indicate that the sugar production is expected to be significantly higher FRPs, called state advised prices.
at around 35 million tonnes in SS 2018-19

46 47
Acuité Ratings & Research India Credit Risk Yearbook-2019

Since December 2017, sugar prices have been on a declining trend owing to excess supply in Improving utilisations helping industry deleverage
the market, and the Government of India has stepped in with certain measures. The govern-
ment doubled import duty on sugar to 100% in the beginning of February 2018 and abolished
ICR NCA/TD
export duty on sugar in the third week of March 2018. Gearing
3.0 2.5 20%
2.7 2.14
In June 2018, the government has fixed ex-mill floor price at Rs.29 per kg and has also im- 2.5 2.7
0.16 15%
2.0
posed stock holding limits on sugar mills and created buffer stock of 3 MT, while stock limit 2.4
2.0 10%
on the sale of sugar by mills has also been imposed after a hiatus of more than five years. 1.7 1.7
1.5
1.5 1.4 0.04 5%
0.72
However, such measures are only expected to have a transient impact with the sugar business 1.0
1.0 -0.05 -0.05 0%
continuing to be exposed to inherent supply-side cyclicality. 0.85
0.55
-5 0.03
0.5 -5%

Profitability expected to remain flat due to lower 0 0.0


0.16 0.13 0.08
-10%
wholesale price and increased supply in global market
FY14 FY15 FY16 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Margins saw a decline over the last two years due to lower realisations and higher input
costs Gearing in the industry is on a declining phase, the major reasons for the decline is increase in
the net worth across the sector in FY17 due to increase in the retained reserves. Further, absence
EBITDA Margins PAT Margins RoCE of major debt funded capex has lowered the debt levels in the sector. This trend is expected
20% 8% 10 to continue over the short term as companies try to reduce stress on their balance sheets to
17% 6% 6% 8
compensate for lower profitability
15% 4% 6
2% 4
Interest coverage ratio and NCA/Debt has been volatile in the sector, attributable mainly to the
11% 11% 0% 2
10% volatility in profit margins in the sector and lower additional debt taken over by companies in
-3% -2% 0
6%
6% -4% -2 the sector. The industry should recover from the lows in FY 18 over the medium term. Current
5%
5%
-7%
-6% -4 ratios in the sector has been below average in the sector.
-8% -7% -8% -6
0 -10% -8
Stretched WC cycles and low liquidity plaguing the system
FY14 FY15 FY16 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE


The industry is marred by low net cash accruals over the past five years. On an average 46% of
Profitability in sugar sector has remained highly volatile. Cane pricing plays an important role in the total borrowing of the industry were short term. The current ratios in the sector was below
determining the profitability of the industry, the rate at which mill owners reimburse farmers are 1.01 over the past 5 years.
determined by the governments. The central government determines fair and remunerative price
The cash conversion cycle of the sector has remained within moderate limits ranging between 95
(FRP), states also determine their own State Advised Prices (SAP), which are generally higher than
days to 115 days in the past 5-year period. The working capital cycle was driven mainly by high
FRP (in FY18 while FRP was ~Rs255 average SAP was Rs.315).
inventory accumulation ranging between 157 to 196 days, the sector further enjoys longer credit
States such as Uttar Pradesh, Punjab, Haryana, Tamil Nadu and Uttarakhand use SAP while from its suppliers. On the back of a good crop year seen in the cane sector, the inventory levels
Andhra Pradesh, Karnataka, Maharashtra Madhya Pradesh and Gujarat use the FRP rates while will be within the same range, further, we expect the sectors working capital cycle to remain
FRP has increased by 50 percent retail selling prices of sugar has increased only by 7% (FY13-18) at the same levels in the medium term.
and thus Ex-mill sugar prices have not risen commensurately, impacting sugar manufacturers
adversely, particularly in the states where FRP/SAP is administered.

48 49
Acuité Ratings & Research India Credit Risk Yearbook-2019

Debtors Days Creditors Days TEXTILES


Inventory Days Cash Conversion Cycle

250
189 183 196
200 182
157
150
101 102 107 115
95
100
108 101 115
90 88
50 25
20 20 23 26

0
Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

Source: Acuité Research, CMIE

Performance of equities volatile


Sector valuation has been volatile and below range over the last 5 years

Index Return BSE 500 Return Index PE times Index PB times

25 2.5
21.29
20 2.0
15 12.69
1.5
10 10.24
5 7.3
1
4.7
0

-5 -3.6 -3.42 0.5


0.7 0.1
-10 -7.41
0
FY13 FY14 FY15 FY16 FY17 FY18
Ju 8

Se 8

O 8

18
M 8
Fe 8

Ap 8

De 8
M 8

No 8
Ju 8
Au 8
1

1
r1
1

1
1

1
1
l1
ay

c
n

ar

v
b

ct
n
Ja

Source: Acuité Research, CMIE


Source: Acuité Research, CMIE
Risk category: Moderate to High
Sector returns are highly volatile as compared to the market. PE is negative as the sector prof-
Textile Industry currently is currently characterised by low profitability and debt protection
itability is under stress. The index is trading well above the sectors book value.
metrics. Exports have seen a decline leading to a decline in the realisations for the players.
However, stress levels are expected to ease slowly given the improving domestic demand &
government’s support to boost the sector.
Key Monitorables
¡¡ Cyclical nature of the sugar industry and agro-climatic risks related to cane availability.

¡¡ Profitability of sugar mills vulnerable to the State government’s policy on cane prices.

¡¡ Being a regulated Industry, it is susceptible to sudden changes in Government policies.

50 51
Acuité Ratings & Research India Credit Risk Yearbook-2019

Higher realisations support the sector even as volumes


Industry background and characteristics
decline
India’s textiles sector is one of the oldest industries in Indian economy dating back sev-
Sales(in Crores) % Growth IIP Index of Textile
eral centuries. The Indian textiles industry is expected to reach US$ 250 billion by 2019. It
165000 8%
contributed 7% of the industry output (in value terms) & 2% to the GDP of India in 2017-18. 160144
India is also the world’s 2nd largest textile exporter & currently possesses a share of 4.7% 160000 6% 119
117 117
in world market. The sector contributed 15% to the export earnings of India in 2017-18. It 4% 5% 117
155000 4%
employs more than 45 & 60 million people directly & indirectly respectively in 2017-18. 3% 108 113
151543
150000 2%
148392
145000 145602
1.23% The Indian textiles industry is extreme- 0%
% Share in 143517
Textile Exports
ly varied, with the hand-spun and 140000 -2%
hand-woven textiles sectors at one -2%

end of the spectrum, while the capital 135000 -4%


24.53%
intensive sophisticated mills sector at FY13-14 FY14-15 FY15-16 FY16-17 FY17-18 2013-14 2014-15 2015-16 2016-17 2017-18

the other end of the spectrum. 60% of


54.36% the industry revenues come from cot- Source: Acuité Research, CMIE Source: Acuité Research, CMIE
19.79% ton based textiles.
Revenues have picked up since FY16 lows driven by readymade garments, manmade
fibers and textile processing segments. These segments witnessed an average growth
rate of 10% over last 3-4 years. Cotton textile sales (yarn & fabric) were driven by higher
realisations despite declining volumes. Prices have increased due to increased input cost.
Cotton Manmade Jute Other Items
Cotton and blended yarn industries are witnessing healthy growth in demand, primarily
driven by exports to china. Due to ongoing trade war between US-China, china has in-
Source: Acuité Research, CMIE creased duties on American cotton, which led to increased imports from India. China’s
import has grown by 60 percent to 315 thousand tonnes in FY19 (Apr-Nov). Other major
export market, Bangladesh has witnessed revival in exports after drop in export in FY18,
Rating distribution: 50% of portfolio is investment grade grown by 25% in FY19 (Apr-Nov). Export Price realisation has witnessed healthy improve-
ment growth over 13% over a year to Rs. 219/ Kg (Nov-2018).
27% 3.0%
Upgraded: 9.1%
In spite of healthy start to FY19, production levels growth remain
subdued over last 5 years
MCR: Production of fabric has grown by 4.8%
Downgraded: 10.3%
0.98 in FY18 after drop in production over last Production (’000 tonnes) % Growth 12%
12% 6000
2 years. This is backed by improved de- 10%
10% 5000
9% 9% mand from apparel, home textile and
4,138 4,062 4,068 8%
Default: 10.3% technical textile manufacturers, since 4000 3,928 4,055
1% 1% 6%
domestic demand has pick-up after the 9.6%
3000 2,792 4%
AAA/A1+ AA A BBB BB B C D effects of GST and demonetisation has
3.2% 2%
waned off. Domestic consumption is esti- 2000
2.1% 3.9%
Source: Acuité Research, CMIE mated to grow by 7-9% in FY18. However, 0%
1000 0.2%
exports dropped by around 4%, primarily -2%
-1.8%
due to huge drop in exports to UAE which 0 -4%
50% Credit ratings of textile companies are in investment grade & 10.3% are in default. Out of the FY19
is India’s second biggest fabric export FY14 FY15 FY16 FY17 FY18
(Apr-Nov)
total, 40% of the companies in default comprise of cotton textile companies. Cotton segment has market, as the export dropped by 38% in
FY18, primarily due to austerity measures Source: Acuité Research, CMIE
above industry average default rate of 12%, while 44% of the companies are investment grade.
taken by government.

52 53
Acuité Ratings & Research India Credit Risk Yearbook-2019

India’s apparel exports have taken strong hits in FY18 as exports dropped by 8% due to both Increasing domestic consumption
external and internal headwinds. Bangladesh and Vietnam are giving tough competition to
India’s export market. Due to implementation of GST, working capital funds had locked up
Cotton Yarn (S Billion) Apparels (S Billion) Fabric (S Billion)
and it also resulted in raising of Input cost, as 90% of apparel manufacturers are in MSME
segment with limited financial flexibility. 1,165
1,110 1,076
1,029
907
Subdued fabric and apparel exports

243.0 242.9
226.8 228.1 219.4 277
227 242 243 237 243 228
226 222 219

2013-14 2014-15 2015-16 2016-17 2017-18

Source: Acuité Research, CMIE


31.2 36.5 35.0 36.4 38.9
28.4 36.5 35.0 16.9 27.4 17.1
14.8 14.8 17.1 14.4

FY14 FY15 FY16 FY17 FY18


Increasing supply on account of improved demand
Total Fabric Exports Bangladesh UAE Sri Lanka
Cotton yarn accounted for the largest share (72%) in total yarn production in FY18, which
Source: Acuité Research, CMIE
recorded a consistent growth of 2.7% CAGR, increasing from 4,712 million kg to 5,676 mil-
lion kg during FY11-FY18. Cotton fabric segment accounted for the largest share (60%) in
total fabric production (66.5 billion sq. m.) in FY18, increased from 31.7 billion sq. m. to 39.9
Apparel Exports (Rs. Billion) Growth billion sq. m. during FY11-FY18 recording a CAGR of 3.5%.
1200 29%
1110.2 1164.6 12% Cotton is the major input cost for cot- Production of Fabrics (Million sq. meters)
1076.4
1000 1029.4 10% ton yarn manufacturing, accounting for 66,514
907.2 8% 60% of input cost. Prices of cotton has
800
13% 6% increased in 2019 primarily due to sharp
600 8% 4% increase in MSP for cotton, increase in 64,333 64,585

400
5%
2%
exports to China and poor cotton sea- 63,481
son due to scanty rainfall and pest at-
200 2% tacks. Government has increase MSP of 62,624
-8%
0 0% medium staple cotton by 28.1% to Rs.
FY14 FY15 FY16 FY17 FY18 5150 per Quintal and 26.2% increase on
long staple cotton to Rs. 5450 per Quin-
Source: Acuité Research, CMIE tal. Due to poor monsoon and pest at-
tacks at many part of the country, cotton 2013-14 2014-15 2015-16 2016-17 2017-18

Overall, exports have declined marginally. Apparels constitute significant proportion of ex- production is expected to drop in FY19.
Source: Acuité Research, CMIE
ports. Their exports have dropped sharply after imposition of GST. Exports of cotton yarn are
continuously decreasing due to fall in demand in China, which is the largest importer of cotton
Cotton production is expected to be 33.5 million bales in FY19 as against 36.5 million bales in
yarn in the world. Rise in input costs has led to increase in prices leading to growing competi-
FY18. Sector is expected to witness muted capacity in medium term in majority of the segments
tion from other emerging economies such as Bangladesh and Sri Lanka. Similarly, demand for
due to cautious approach in capacity addition as there is excess capacity in the segment.
fabric has also fallen. Also, shortage of skilled labor has reduced output, which subsequently
Spinning segment has witnessed significant drop in new project announcement since the pro-
contributed to reduction in exports.
duction levels had barely grown over last 5 years.
Good raw material availability and low labor costs provide a significant competitive advan-
tage to India, thereby reducing cost per unit. Favorable trade policies and superior quality are
expected to drive textile exports. Also, depreciation of rupee will lead to higher export values.

54 55
Acuité Ratings & Research India Credit Risk Yearbook-2019

Rising price of Cotton investments in the sector witnessing a dip Decline in profitability driven by increase in input cost and
declining margins
New Project Announced (Fabric)
New Project Announced (Garment) Operating Margin NP Margin RoCE
Medium Staple Long Staple
New Project Announced (spinning)
126.5
14% 13%
13% 13%
115.8 115 12% 15% 15%
3%
114.1 3% 14%

102.3 108.2 107.8 2% 14%


11%
95 1%
93.4 1%
90.9

FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
FY15 FY16 FY17 FY18 FY19 2013-14 2014-15 2015-16 2016-17 2017-18
(Apr-Jan)
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
Source: Acuité Research, CMIE Source: Acuité Research, CMIE

PAT margins have declined at CAGR 9% as against a revenue growth at CAGR 3% FY14-18,
Govt. policies have been very friendly for the sector EBITDA margins have increased marginally at CAGR 2% FY14-18. Input costs such as cotton is
highly volatile and seasonal, increasing crude prices impact the cost of other manmade fibers
and fuel costs, thereby affecting the margins.
The Government of India has increased the basic custom duty to 20% from 10% on 501 textile Implementation of GST has added pressure to the input costs. Further, need to sustain reve-
products, to boost ‘Make in India’ and indigenous production.
nues, while global competition has been increasing is reducing margins on sales. We expect
The introduction of Goods and Services Tax (GST) is expected to result in ‘fibre-neutrality profitability to be largely affected due to high cost and lower volumes in manmade fibers
effect’, which means that all man-made and natural fibres will be treated equally from the and increasing cotton prices.
tax point of view. The GST rate on cotton yarn is 5%; a low and uniform GST is expected to
lead to further standardisation of cotton yarn industry.
Gearing Levels are seeing an improvement due to higher
The Government has been implementing various policy initiatives and programmes for de-
velopment of textiles and handicrafts, particularly for technology, infrastructure creation,
equity infusion
skill development, including PowerTex India Scheme, Scheme for Integrated Textile Parks,
D/E Ratio ICR NCA/TD
Technology Upgradation Fund Scheme, SAMARTH- scheme for capacity building in Textile
Sector, among others. 0.15
0.14
The Government of India plans to connect around 50 million women in Indian villages to 0.13
1.4 1.3 0.11 0.11
charkha (spinning wheel) in the next 5 years with the aim of providing employment and pro- 1.3
2.6
moting khadi. 2.3
1.1 2.2
The Union Ministry of Textiles along with Energy Efficiency Services Limited has launched a 2.1 2.0
0.8
technology upgradation scheme called Sustainable and Accelerated Adoption of Efficient
Textile Technologies to Help Small Industries for reviving the powerloom sector of India.

FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Gearing levels of the sector has improved over the past 5 years. Significant equity infusion
has taken place in FY18 by companies such as Grasim Industries Ltd, thereby strengthening
the overall gearing. Further, due to slower movement in capex in the sector has resulted in
lower additional debt, thereby reducing interest costs, have improved the debt protection
metrices. While we expect gearing to remain moderate, the debt protection to is likely to
see a decline due to lower profitability in the sector.
56 57
Acuité Ratings & Research India Credit Risk Yearbook-2019

Liquidity profile dominated by lower cash accruals, working M AC H I N E RY


capital driven by seasonal availability of input stock
The industry has moderately favorable liquid-
Debtors Days Creditors Day
ity profile. Marked by moderate net cash ac-
Inventory Days Cash Conversion Cycle
cruals of 6-8% over revenues, in the past five
years. On an average, 51% of the total bor- 119 115 112
rowing of the industry was short term. The 109 110
cash conversion cycle of the sector has re- 93 92
99 98 97
mained at high ranging between 109 days to
119 days in the past 5 year period.
58 59 61
It is driven by high inventory holding peri- 51 53
od ranging from 93-97 days over the past 42 45
5 years, due to seasonal availability of input 35 35 38

stock. We expect the sector to maintain av-


erage working capital cycle and liquidity po- FY14 FY15 FY16 FY17 FY18
sition in the near to medium term.
Source: Acuité Research, CMIE

Textile Returns Sensex Returns Index PB (Times)


4.37

3.24
2.62
2.20
1.47
Ju 8

Se 8

O 8

18
M 8
Fe 8

Ap 8

2013-14 2014-15 2015-16 2016-17 2017-18


De 8
M 8

No 8
18

Au 8
1

1
r1
1

1
1

1
l1
ay

c
n

ar

v
b

ct
n
Ja

Ju

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Risk category: Moderate


In the year 2018, sector has underperformed over the broader market. Also, the sector is
trading in negative P/E and due to deteriorating net worth P/B is increasing over last 5 years.
Machinery sector is moderately stressed on account of a below average financial risk
profile, unorganized and smaller scale of operations and high levels of imports compet-
Key Monitorables ing with local manufactures. Acuité expects the stress level to remain in coming years
due to no signs of pick-up of investment in capital goods manufacturing. Furthermore,
the growth in capital goods demand due to pick up in Gross Capital Formation is expect-
¡¡ Fluctuations in and regulation of raw material (cotton) supply and prices
ed to be met through an increasing proportion of imports.
¡¡ Agro-climatic conditions

¡¡ Domestic market sensitive to consumer spends, linked to economic cycles

¡¡ Trade policy of importers

¡¡ Foreign exchange risk

¡¡ Risk of technology change and associated capital costs for upgradation

58 59
Acuité Ratings & Research India Credit Risk Yearbook-2019

Industry background and characteristics Growth to be stagnant due to lack of investments and
increasing imports
Machinery sector forms backbone to Indian manufacturing sector and is a core manufactur-
ing segment in the country. Machinery manufacturing offers immense opportunity for MSME’s Decline production and sales in FY18 due to
with number of MSME’s operating in segment. Capital goods weightage stood at 8.22% in IIP GST and demonetization
Base (2011-12). However, India remains net importer of capital goods as significant portion of
Machinery manufacturing segment had
domestic demand is met through the imports, contributing further to trade deficit. Machinery 160 Net Sales (’000Rs. Cr) Growth 15%
witnessed stagnant growth over last four
sector is primarily classified into 10.7%149.25
150 10% years, growing at CAGR of 1.5%. This was
8.0%
¡¡ Non-Electrical Machinery (General Purpose, Industrial, Boiler & Turbine, among others) mainly due to the decline in segments
140 138.72 5%
¡¡ Electrical Machinery (Transformer’s & Generators, Industrial cooling equipment,among others) such as Boilers & turbines, Generators
134.83
130.69 & Transformers that witnessed nega-
130 0%
124.85 tive growth in revenue. Boiler & Turbine
manufactures are hit hard by reduced
Rating distribution: 58% of portfolio is investment grade 120
-4.5%
-5%

-7.1% new capacity in thermal power segment


110 -10%
FY14 FY15 FY16 FY17 FY18 in FY18, while Generators & Transform-
29.9% er sales decline is due to poor financial
Source: Acuité Research, CMIE
Upgraded: 8.3% health of discoms, which is hampering
21.1%
19.7%
the spending. Generator & transformer segment is expected to witness revival in growth
15.2% MCR:
Downgraded: 10.5%
0.97 due to government reforms; however, boiler & Turbine manufactures are expected to remain
8.3%
under stress with low capacity addition in future.

3.6% Default: 8.3% Production of transformer has grown to 260GVA in FY18 (Apr-Feb), growth of 26%, driven
1.9%
0.2% by increased in demand for power transformer, as the transformation capacity has grown
AAA/A1+ AA A BBB BB B C D by CAGR 12% over last 5 years to 826,958 (MVA). Distribution transformer has also shown
revival after decline in FY17, growing 18% in FY18 (Apr-Feb) as the discoms show signs of
Source: Acuité Research, CMIE
recovery since implementation of UDAY scheme.

Credit profile of the industry is moderate with 58% of portfolio is in investment grade; Growing demand of transformers Subdued demand for boilers and turbines
however, 30% of the portfolio is in high risk category (B category) which indicates high
probability of default in this category. 260
249
234
General purpose machinery companies have healthy credit profile with 67% of portfolio 21.92
208
in investment grade, while only 4% of portfolio is in default category. Transformer seg- 188 18.77
ment has over 47% of portfolio in high risk (B) category due to un-organised nature of 16.17 16.94
15.54
the segment, with high level of SME participation in this segment. Industrial machinery
segment has highest level of defaults, 12% of portfolio is in default; however, 61% of port-
folio remains in investment grade.

FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18

Total Production (Gva) Total Production ('000 Rs. Cr)

Source: Acuité Research, CMIE Source: Acuité Research, CMIE


60 61
Acuité Ratings & Research India Credit Risk Yearbook-2019

Demand for boilers and turbines have been falling rapidly due to subdued addition in India meets its significant amount of demand through the imports. Exchange rates have wit-
thermal power plants. Fuel shortage, shift towards renewable sources, lack of Power nessed high level of volatility in 2018 due to rising oil price and changing monetary policy in de-
Purchase Agreements (PPA), low plant load factor and lower than expected electricity veloped markets, which had put strain on emerging markets currency. Pressure on emerging
markets currency waned as oil price subdued on expected lower demand on fear of hard-fall
demand have been deterring investments in thermal power. We expect the demand to
of economy of China.
remain subdued in coming years as well.
Iron and steel is the major raw material for manufacturing capital goods and therefore major
Pump segment has been witnessing healthy demand over last decade driven by increas- factor for determining the cost competitiveness. Majority of steel consumed is domestically
ing government spending on irrigation projects and erratic monsoons causing farmers produced; hence, domestic prices drive the margins of the manufacturers. Domestic steel pric-
to opt for pumps for a reliable source of water supply. es have increased by over 20% over the last year.

Indian Pumps industry size is estimated Govt. policies targeted towards indigenisation are expected to see
Agriculture remains leading consumer
to be around Rs. 1400 Cr, while centrif-
of Pumps positive results over the medium-long term
ugal market is estimated at Rs. 1130 Cr.
Import of pumps constitutes over one- Government has increased the spending on infrastructure, in union budget 2018-19 with in-
Agriculture
third of the Indian pump demand, im- 13% frastructure allotment increased by 20.9% to Rs. 6 lakh crore. Due to increased focus on in-
Building Services
ports has grown by 26.7% in FY18 to Rs.
4% 27% frastructure, ease of doing business, climate in India, GST and demonetisation effects waning
8%
Water and Wastewater off, India is expected to witness healthy Gross Fixed Capital Formation, which would increase
5095 Cr, however revenue of top 3 In- Management
demand for capital goods.
dian players stood stagnant during this Power Generation
12%
period. Domestic players face increas- Oil and Gas Government has set target of 175GW of renewable capacity by 2022, which could result in
19%
ing competition from cheaper imports Metal and Mining lower capacity addition from thermal power plants. This could impact sales of boiler and tur-
17%
Others bines in medium term.
from china, as the import has grown
over 60% to Rs. 1295 Crore in FY18. Implementation of UDAY scheme and government efforts on increasing transmission capacity
Source: Indian pumps and valves would increase the demand for power transformers and distribution transformers.
Capacity additions remains muted with projects completed standing at 5 years low in FY18,
also project under implementation is below FY14 peak and projects dropped remains high.
Profitability has remained range bound
Capacity addition from electrical machinery stood very low with project completed of Rs. 351
Cr in FY18. Capacity additions are expected to remain muted in coming years, as most of
demand is expected to meet by imports. PAT Margin EBITDA Margin RoCE
19.6%

16.0% 17.0%
Investments in the sector declining 13.3%
14.2% 14.1% 14.7% 14.4% 14.4%
12.5%
21.3

17.5
4.2% 3.5%
2.4%
11.8 1.6%
10.2 -1.2%
8.5 FY14 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
FY15
6.6 6.0
5.8 5.6 5.3
4.1 4.0 3.8 Source: Acuité Research, CMIE Source: Acuité Research, CMIE
2.8
1.8

FY14 FY15 FY16 FY17 FY18


Operating Profitability of the industry is steady as EBITDA improved from 14.1% in FY18, howev-
er net profitability has declined with PAT margin dropped to 2.4% in FY18 and RoCE declined to
Projects Completed ('000 Rs. Cr) Projects Dropped ('000 Rs. Cr) Under Implementation ('000 Rs. Cr)
14.4% due to lower capacity utilisation in Boiler & Turbine segment and Transformer segment.
Profitability is expected to remain steady in the medium term.
Source: Acuité Research, CMIE

62 63
Acuité Ratings & Research India Credit Risk Yearbook-2019

Gearing and the protection metrics at healthy levels Lacklustre equity performance
Index Return Market Return Index PE Times Index PB Times
D/E
ICR NCA/Total Debt 273.1
0.38 0.38
0.36 4.0 0.40
0.34 0.33 0.34
0.33 188.3
3.0 0.30
2.57 2.36 2.96 2.44

2.0 0.23 0.23


0.20 101.6 105.1
1.20 91.6

1.0 0.10
0.07
2.4 3.8 3.0 3.8 3.5
0.0 0.0

18
18
18
18

18
7

17

17
FY14 FY15 FY16 FY17 FY18

l1
l1
FY14 FY15 FY16 FY17 FY18

v
p
ay
2013–14 2014–15 2015–16 2016–17 2017–18

n
p

ar

Ju
v
Ju

No
Se
Ja
No
Se

M
M
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
Gearing remains healthy as D/E ratio remains less than 0.4. Debt-protection metrics remains
healthy in spite of dip in FY18 due to lower net profitability in Boilers and Transformers seg- Sector has underperformed the broader market in 2018, sub-segment such as Boiler & Tur-
bines and Generators & Transformer have been the worst performers. In addition, some of
ment. Debt levels are expected to remain healthy with capacity addition expected in medi- the sub-segments have negative P/E and deteriorating net worth.
um term to be moderate.

Key Monitorables
WC requirement of the sector really high with no signs of
improvement ¡¡ Demand for capital goods depends upon fixed capital formation in the economy. This
depends upon government and private investment. India is yet to witness high level of
private investment, it remains to be seen how private investment span out in coming
The cash conversion cycle of the sector has remained at high ranging between 123
days to 148 days in the past 5 year period. The working capital cycle was driven main- years.
ly by high level of debtor days, ranging between 190 days to 219 days over the past ¡¡ UDAY scheme is yet to show desired results as ATC losses still stands over 20% and ACS-
5 years. The sector payment to suppliers also stood stretched with average of over
ARR Gap remains at Rs. 0.34 /unit. How discoms are able to turnaround the current
150 days credit from its suppliers.
result will be key demand factor for distribution transformer.
The sector has seen low net cash accru- Debtors Days Creditors Days
als over the past five years. On an aver- Inventory Days Cash Conversion Cycle ¡¡ India remains the net importer of Capital goods and exchange rate remains key factor
age, 65% of the total borrowings of the 250 for import. India has witnessed volatile exchange rate in 2018. Going forward, how the
industry were short term. The current ra- 210
219
monetary policy spans out given the policy uncertainty surrounding RBI policy will be a
200
tios in the sector were healthy ranging 210 193 190
key monitorable.
between 1.3 to 1.5 over the past 5 years. 169
170 158 153
157 150
We expect the sector to maintain stable 140
130 148
working capital cycle and a moderate 132 139
123
liquidity position in the near to medium
90 96
term. 96 89 86
91

50
FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE

64 65
Acuité Ratings & Research India Credit Risk Yearbook-2019

INFR ASTRUCTU RE Industry background and characteristics


Infrastructure sector is one of the key drivers in the Indian economy and includes power,
bridges, dams, irrigation, roads, highways, ports, airports and other infrastructure devel-
opment. This report aims to give a broad outlook on the roads and highways, irrigation,
railways, ports and airports.
India has road network spanning over a total of 5.5 million km (National Highways: 0.12 Kms;
Roads: 5.2 million km; State highways 0.16 km). The Indian roads carry almost 90 percent of
the country’s passenger traffic, sales of automobiles and movement of freight by roads is
are growing at a rapid rate.
Around 95 percent of India’s trading by volume and 70 percent by value is done through
maritime transport. India has 12 major and 200 notified minor and intermediate ports. The In-
dian ports and shipping industry plays a vital role in sustaining growth in the country’s trade
and commerce. India is the sixteenth largest maritime country in the world, with a coastline
of about 7,517 km. Some of the major port operators are ESSAR Ports Ltd., Adani Ports and
Special Economic Zone Ltd.
While the infrastructure projects are awarded by the government of India based on tenders,
the key players in this industry include Larsen & Tubro Ltd, Reliance Infrastructure Ltd, GMR
Infrastructure Ltd, Ashoka Buildcon Ltd.

Rating distribution: 56.6% of portfolio is investment grade

28%

Upgraded: 10.4%
21% 20%
18%
MCR:
Downgraded: 16.5%
0.92

6% 5%
Default: 20.3%
Risk category: Moderate 2%

AAA AA A BBB BB B D
Infrastructure sector covering construction contractors is under high debt levels leading to high
interest expenses and lower profitability. Furthermore, increasing operational costs, unrealized
Source: Acuité Research, CMIE
payments from customers and cash flow mismatch continue to cause liquidity challenges.

Credit ratings of infrastructure sector companies are moderately skewed with about 53%
of portfolio in Investment grade, while 23% of portfolio is in default grade. Most defaulting
companies were noticed in the construction of roads, bridges, and tunnels sub segment
with 25% of the companies in this sector defaulting (72% of all defaulting companies). The
major reasons for defaults is are lower profitability and slower recoveries from govern-
ment agencies.

66 67
Acuité Ratings & Research India Credit Risk Yearbook-2019

Govt. spending especially in roads sector has given a The Ministry of Road Transport and Highways has fixed an overall target to award 15,000 km
boost to the infra segment; profitability still a major projects and construction of 10,000 km national highways in FY19. A total of about 295 major
projects including bridges and roads are expected to be completed during the same period.
concern
The Government of India will spend around Rs. 1 lakh crore (US$ 15.26 billion) during FY18-20
Highway construction grew at a rapid pace 22.6% CAGR over the last 5 years to build roads in the country under PMGSY. Under the Union Budget 2018-19, Government of
India allocated an investment of Rs. 19,000 crore (US$ 2.93 billion) PMGSY.
Total length of road cnstruction in '000 Km Highway Construction in Kms Companies enjoy 100 per cent tax exemption in road projects for 5 years and 30 per cent
11000 relief over the next 5 years. Companies have been granted a capital of up to 40 per cent of
60 9629 the total project cost to enhance viability under the HAM scheme.
49 9500
50 47

38 35 8000
8231
Of the various Public-private partnership (PPP) models introduced
40
27 6061
by the government to award projects, HAM model continues to gain
28 6500
30
popularity
5000 4260 4410
20

10 3500 HAM was brought in as projects under the EPC model were facing significant delays and
cost escalation, which hurt the margins of road developers. Introduced in Jan 2016, HAM was
- 2000
established to revive investments in road infrastructure projects. HAM was designed to be a
FY13 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
hybrid between EPC (engineering, procurement and construction) and BOT (build, operate and
transfer) models. Under the annuity model 60 percent of the investment is borne by the private
Source: PMGSY, Acuité Research Source: NHAI, Acuité Research investors 40 per cent by NHAI in 5 equal installments. Currently, about 30 projects have been
awarded under this model by NHAI, with a total cost of Rs. 28,000 crore. HAM constitutes ~55
As per National Highways Authority of India (NHAI), construction of highways reached 9,829km per cent of projects awarded by NHAI followed by EPC at 35 per cent. HAM projects have
during FY18 which was constructed at an average of 26.3 km per day (FY14: 11.6 kms per day), enabled revival in private sector participation despite some pressures on the financial closure.
we expect it to reach 30-32 kms per day in FY19. The Government of India has set a target
for construction of 10,000 km national highway in FY19. During April-August 2018, 2,345km of
national highways was constructed. A total of 200,000 km national highways are expected to Despite decline, margins continue to remain healthy for
be completed by 2022. Currently, most highways in India are not four laned, thereby giving privatised airports thus enticing more investments
impetus for growth in this sector.
While, in road construction total length of roads constructed under Prime Minister’s Gram Sa- Aviation sector in India has seen tremendous growth in the past decade. India’s domestic avi-
dak Yojana (PMGSY) was 49,000km in 2017-18. Last financial year, the Ministry of Road and ation market has become the third largest in the world and the overall civil aviation market^
Transport (MoRTH ) awarded projects of around 17,000 km, of which 7,397 km was awarded in India is all set to become the world’s third largest by 2024^. Currently, there are 102 op-
by NHAI. This is 70 percent higher than in the previous fiscal, according to analysts. MoRTH has erational airports in India, 588 airplanes were in-service in the fleet of Indian airlines and ex-
targeted to award 20,000 km in the current fiscal, up by 25 per cent from last fiscal. pected to grow 1,100 planes by 2027, AAI aims to bring 250 airports under operation across
the country by 2020.
Promising growth backed by robust order book position:
AAI is expected to invest Rs. 15,000 crore in 2018-19 for expanding existing terminals and
Most companies in the sector showed a healthy order book position for Q2FY19, the levels constructing 15 new ones. It has opened airport sector to private participation, six airports
stood at more than 3x sales for Q2FY19, while last year it ranged between 2.0x to 2.5X, pro- across major cities are being developed under the PPP model. The industry is looking forward
viding high revenue visibility for the sector in the medium term. Whereas with over Rs.7 trillion to Rs.35000 crore equity infusion in the next four years.
road construction orders yet to be awarded under Bharatmala, a healthy revenue visibility is
provided for the long term. Major private sector players in the industry include GMR Infrastructure Ltd. (Delhi & Hyderbad
Airports), GVK (Mumbai Airport), Siemens , LNT and Unique (Bengaluru Airport). These players
Government spending in the sector to grow exponentially currently account for 60 per cent of airport traffic handled in the country, while the remaining
40 per cent is managed by AAI.
During FY19, the government has allocated Rs. 71,000 crore to the development of Nation- Going ahead, about 15 profitable airports under AAI (including Chennai and Ahmedabad) are
al highways. As of October 2018, total length of projects awarded was 6,400 kms under being considered for privatisation.
Bharatmala Pariyojana (including residual NHDP works). As of August 2018, a total length of
34,800 km road projects have been proposed to be constructed. Under Bharatmala Pariyoja-
na Phase-I, Government of India has approved highway projects worth Rs.2 billion to improve
connectivity among Gujarat, Maharashtra, Rajasthan, Madhya Pradesh and Diu.

68 69
Acuité Ratings & Research India Credit Risk Yearbook-2019

Profits of leading private sector airports decline despite of increasing Govt measures to see accelerated impact in infrastructure
footfall development in the long run
Revenues in the airport sector is driven
Sales (Rs. in '00 Cr) PAT (Rs. in '00 Cr) PAT Margins from retail sales contributing to ~29%, GOI has set up the India Infrastructure Finance Company (IIFCL) to provide long-term funding
followed by space rentals at ~18% and for infrastructure projects. Interest payments on External Commercial Borrowings for infra-
120
32%
35%
cargo ~11% of revenues. Inspite of in- structure are now subject to a lower withholding tax of 5 per cent vis-à-vis 20 per cent earlier.
100 26% 30% creasing footfall and freight traffic GMR IDF income is exempt from income tax. In May 2018, IIFCL Mutual Fund launched infrastructure
102
80
25% infrastructure reported PAT losses in debt fund (IDF) scheme with Corporation Bank, Oriental Bank of Commerce & IIFCL as inves-
88
20% Q1FY19 for the Delhi airport, stating the tors, and Canara bank & HUDCO as strategic investors.
60
15%
reason for declining profits is as the im-
40 plementation of tariff by the Airport Eco-
10%
nomic Regulatory Authority (AERA).
20 33
23 5% Increase in finance costs puts downward pressures on
-
FY17 FY18
0% margins
EBDITA % PAT % RoCE
Source: Acuité Research, CMIE
12%

Investments in ports to see an uptick in the near to medium term 20%


1.3%
16%
17%
16% 16%
2.0% 11%
11% 11%
10%
15% 13% 0.0% 10%
0.6% 9%
Under the National Perspective Plan for Sagarmala, six new mega ports will be developed in 15% 0.2%
9% 9%
8%
the country. 10% -2.0%
7%
The Indian Government plays an important role in supporting the ports sector. It has allowed 5%
-2.4%
-4.0% 6% 7%
Foreign Direct Investment (FDI) of up to 100 per cent under the automatic route for port and 5%
- 4.7% - 4.6%
harbour construction and maintenance projects. It has also facilitated a 10-year tax holiday 0% -6.0% 4%
to enterprises that develop, maintain and operate ports, inland waterways and inland ports. FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18

Unexecuted and delayed projects, cost over runs plaguing Source: Acuité Research, CMIE Source: Acuité Research, CMIE
irrigation infrastructure
EBITDA levels in the industry have been between 13-17%; however, the sector’s PAT margins
Currently, there are 557 irrigation projects yet to be completed. Andhra Pradesh has complet- have declined significantly. The main reason for decline in PAT margins is increasing interest
ed only 17 projects out of the allotted 105 projects, followed by Karnataka [33/305], Maha- costs, which increased by a CAGR of 10% FY13-18, while sales grew at CAGR of 2% FY13-18.
rashtra [94/186] and Madhya Pradesh [90/242] projects. Major factors responsible for this
include, inter alia, improper synchronisation of project components and delayed tendering and Finance cost attributed to 10% of turnover in FY13 has increased to 14% of turnover in FY18.
contract management, land acquisition, delays in construction of railway/highway crossing. There is an increased focus on volume growth in the sector. Increase in high value orders,
A study by the Planning Commission on cost overruns found that for a representative 12 proj- and further sub-contracting the same has lowered the overall volumes in the sector. Some
ects, there was an escalation of the order of 138 percent over the original cost. The failure companies in the sector with higher PAT losses in FY18 are Prathiba Industries Ltd. and IVRCL
to complete projects was attributed to management failures and deficiencies with respect to Ltd, among others.
non-compliance with surveys and investigations required to make detailed reports. In 2016,
CAG had reported of various diversions of funds, on incomplete irrigation projects.
The Union Cabinet has given a nod for implementation of the Shahpurkandi Dam project on the
Ravi river in Punjab with a central assistance of Rs.4.85 billion over 2018-19 to 2022-23. The
project, after completion, will have an irrigation potential of 5,000 ha in Punjab and 32,173 ha
in Jammu and Kashmir.

70 71
Acuité Ratings & Research India Credit Risk Yearbook-2019

Higher debts and lower capital influx continues to strain Equities have underperformed. Valuation remain high
the debt protection metrics
Index Return BSE 500 Return Index PE times Index PB times
Gearing ICR NCA/TD
115 120 100 3.0
1.7 1.5
1.5 0.07 110 100 90
1.6 1.4 2.5
1.5 80
1.4 0.05 105 80
1.3 1.3 1.3 70 2.0
1.2 1.3 0.05 1.2 1.2
0.03 100 60
0.04 60
1.1 0.03 1.5
1.0 0.01 95 40 50
0.9 90 20 40 1.0
0.00 (0.01)
30
85 0 0.5
0.7 (0.02) (0.02) (0.03) 20

Jan-18

Sep-18
Aug-18
Apr-18

Jul-18
Jun-18

Oct-18
Feb-18

Dec-18
Mar-18

May-18

Nov-18
0.5 (0.05) 10 0.0
FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18E

Source: Acuité Research, CMIE Source: Acuité Research, CMIE Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Sector returns are lower as compared to the market. PE index is volatile and running higher
Gearing in the sector is deteriorating YoY, the major reason for the decline is increase in debt
at the rate of 11% FY13-18, while net worth has increased only by 4% FY13-18. Delays in col- than the PB index in FY16. Sector is expected to be stable in the short to medium term.
lections and higher inventory accumulation have added pressure on the segment to resort to
higher borrowings, thereby higher interest and lower cash accruals.
Key Monitorables
WC cycles are healthy and range bound as liquidity is
¡¡ Execution of various project awarded as per timelines,
monitored closely in the sector
¡¡ Funding support from banks for execution of projects
The industry has seen low net cash accruals
¡¡ Quick realisation of stalled payments, stretched liquidity and cash flow management
over the past five years. On an average, 54% Debtors Days Creditors Days
of the total borrowings of the industry were Inventory Days Cash Conversion Cycle
short term. The cash conversion cycle of the 200
191
172
sector is on an increasing trend from 56 to 77 155
days, it is mainly driven by high debtor conver- 150
142
130
144
128
sion cycle which ranged between 128-191 days 109 114
103
over the past 5 years and similarly high cred- 100 77
itor days of 103-144 days. The major reason 56
66 72 70

for stretch in collections is the need for various 33 31


50 32 28 29
inspections to clear payments by the govern-
ment. The current ratio of the sector was mod-
0
erate and remained above 0.97 over the past FY 14 FY 15 FY 16 FY 17 FY 18
5 years.
We expect the WC cycles and liquidity profile Source: Acuité Research, CMIE
to remain stable over the medium term.

72 73
Acuité Ratings & Research India Credit Risk Yearbook-2019

G E M S & J E W E L L E RY Industry background and characteristics


The Gems and Jewellery sector plays a significant role in the Indian economy, contributing
around 7 per cent to the country’s GDP and 15 per cent to India’s total merchandise exports.
It also employs over 4.7 million workers. As one of the fastest growing sectors, it is extremely
export oriented and labor intensive. Based on its potential for growth and value addition, the
Government of India has declared the Gems and Jewellery sector as a focus area for export
promotion. India’s Gems and Jewellery sector has been contributing in a big way to the coun-
try’s foreign exchange earnings (FEEs). The Indian government presently allows 100 per cent
Foreign Direct Investment (FDI) in the sector through the automatic route.
Some of the major brands in the Indian jewellery segment are Gili, Tanishq, and TBZ, while
companies such as Reliance Retail, D Damas Jewellery, Gitanjali Gems Limited, Swarovski,
Diamond Trading Company, Vardhaman Developers, Dubai-based JoyAlukkas, Viswa and Devji
Diamonds, and Gold Souk India are major players in the Indian gems and jewellery retail sector.

Rating distribution: 66% of portfolio is investment grade


34%

10.3%
Upgraded: 10.3%
24%
21%

MCR:
Downgraded: 10.3% 1.00

7% 7%
3% 3%
Default: 20.7%

AAA AA A BBB BB B D

Source: Acuité Research, CMIE

Credit profile of the companies in the industry is quite favorable with almost two-third of
the portfolio in investment grade and a default rate of 21%. Companies which have been
upgraded are in investment grade category. MCR of 1 indicates moderate credit profile.
Risk category: Moderate
Demonetisation and GST left a visible negative impact on
Gems & Jewellery sector is under moderate stress on account of stagnant growth in terms of
sales. Low demand growth for gold & jewellery is the primary cause of concern in the industry.
the sector in FY18
In FY19, bank credit especially to the diamond segment has reduced and is expected to remain Diamonds Imports('000 carats)
Sales(₹ in Crores) Sales Growth
depressed. However, to the business environment has improved for organized gold jewellery
Diamonds Exports('000 carats)
companies who are expected to see incremental market share gains as they reap the benefits 100000 40%
of GST implementation.
32% 76741 30%
80000
66978 67337 66905 202048
20%
60000 160621
50655 14% 150693 151033 153013
10%
40000
1% 0% 85977 79350 68468 75458
66489
20000 -6%
-10%
-13%
0 -20%
2013-14 2014-15 2015-16 2016-17 2017-18 2013-14 2014-15 2015-16 2016-17 2017-18

Source: Acuité Research, CMIE Source: Acuité Research, CMIE


74 75
Acuité Ratings & Research India Credit Risk Yearbook-2019

The Indian gold jewellery industry has not witnessed any significant growth in the last few Gold Imports have risen 22% by volume in Gold Imports on the up in post FY 16
years. The reason for insignificant growth is the change in lifestyle of the younger generation. FY18 as compared to FY17, whereas Gold
Post demonetisation and the implementation of the goods & services tax (GST), the growth in
the gems & jewellery industry took a sharp fall. The industry is expected to grow at a faster Production has increased marginally indi-
pace over a low base going ahead, supported by stable rural demand, wedding season, cating increase in overall supply. Gold Imports (Tonnes) Gold Production(Kg)
cultural affinity for gold, rising disposable income and favorable demographic profile. In ad-
dition, domestic demand is expected to improve due to factors such as high inflation, gold as Falling stock markets in 2018 has led to 1,564 1,595 1,648
1,441
1,323
asset class for portfolio diversification, gold as protection against volatility and geo-political increase in demand for gold from inves-
tensions. tors with a view to diversify their portfo- 915 968 955
780
Imports for diamonds have been increasing continuously due to increase in domestic demand. lios. Also, depreciating rupee has caused
662

Exports have started to rise again after fall in FY16. Increase in world demand for diamonds
investors to hedge their risk with exposure
and rupee depreciation are among the reasons that have led to rise in exports.
to gold. Thus, increase in demand for gold
Post recovery in FY 17 prices have seen has led to increase in imports.
2013-14 2014-15 2015-16 2016-17 2017-18

downward revision
Source: Acuité Research, CMIE
After sharp recovery in FY17, gold prices
Gold Price (₹/10Gm) Silver Price (₹/kg ) have again started to fall due to trade Govt. policies aimed towards promoting monetisation of
dispute between US and China. This
50000 dispute has created a safe haven de- household gold reserves
45725
40000 39756
42036 mand for dollar which has contributed The government has rolled out Gold Monetisation Scheme that enables individuals, charita-
38837
35571 to fall in gold prices. Prices of silver have
29203 ble institutions, central government, state governments, government entities, trusts and mu-
30000 27416 29304 again started to decline after recovery
29696
26553 in FY17, volatile since last 5 years, and tual funds to deposit gold with banks and earn interest on the same in return. However, the
20000
have moved in same direction with that scheme has not turned out to be much successful due to the sentiment attached to physical
10000 of gold. gold. Nearly 75 percent of all gold stored in household is in the form of jewellery which has
0 a sentimental value attached to it.
2013-14 2014-15 2015-16 2016-17 2017-18

Source: Acuité Research, CMIE The government has been recommended by NITI Aayog to set up gold board and bullion
exchanges across the country to have greater monetisation of the yellow metal. Also, it has
Decrease in Gold Exports; Stagnant Silver Exports
been suggested to bring down import duty on gold from the existing level of 10 percent and
Silver Exports(Kg) Gold Exports(Kg) slash the GST rate on the precious metal from the current 3 percent.
Gold exports have fallen drastically
in FY18, mainly post GST implemen- 135,270
130,030 The Gems and Jewellery Export Promotion Council (GJEPC) signed a Memorandum of Under-
tation. The 3% GST has led to a re- standing (MoU) with Maharashtra Industrial Development Corporation (MIDC) to build India’s
duction in purchases by non-resident
Indians. In addition, it has become largest jewellery park in Ghansoli (Navi-Mumbai) on a 25 acres land with more than 5000
more expensive for foreigners to im- 70,720 70,795 jewellery units of various sizes ranging from 500-10,000 square feet with overall investment
port from India. After substantial in- of Rs. 13500 crores (US$ 2.09 billion).
crease from FY15 levels, silver exports 34,247
30,000 32,760 29,500
36,930

too have been stagnant since past 3


7,571
years due to subdued demand.
2013-14 2014-15 2015-16 2016-17 2017-18

Source: Acuité Research, CMIE

76 77
Acuité Ratings & Research India Credit Risk Yearbook-2019

Improving Operating Margins & ROCE; Stable Net Profit WC requirements of the sector remain volatile
Margins The industry has an average liquidity profile.
NP Margin Operating Margin RoCE
Debtors Days Creditors Days The net cash accruals in the sector is low
Inventory Days Cash Conversion Cycle
due to low profitability margins, the NCA to
250 221 50
7%
18% 17% 17% total revenue in the sector ranged between
15%
6% 16% 15%
200 29 30 35 2-3%. The dependency on short term debt in
14% 12% 14 0 the sector is high, owing to less capex in the
5% 5%
4% 12% 150 segment and was at 99% in FY18 of the to-
10% -50 tal borrowing of the industry. The cash con-
3% 8% 86 87 85
2% 2% 2% 2%
100
66
version cycle of the sector is quite volatile,
6% 66 62
-100 it is mainly driven by stretched creditor re-
4% 79
50 75
61 -115
payment cycle, which stands at 35 days. The
2%
39 35 41 40 41 current ratios in the sector was moderate
0% 0 -150
2013-14 2014-15 2015-16 2016-17 2017-18 2013-14 2014-15 2015-16 2016-17 2017-18 FY14 FY15 FY16 FY17 FY18
and ranged between 1.2-1.4 over the past
5 years. We expect the liquidity profile and
Source: Acuité Research, CMIE Source: Acuité Research, CMIE cash conversion cycle to remain stable over
Source: Acuité Research, CMIE the short term.
EBITDA margin expansion is driven by higher operating leverage. Although, operating margins
have increased, net profit margins have remained at the same levels due to rise in interest costs Sensex has outperformed Gems & Jewellery Index
on account of increasing working capital funding. ROCE has increased due to improved profit-
Gems Jewellery Index Sensex Index PB
ability. Going forward, profitability may rise if supported by demand.
120
10

Comfortable Leverage Ratios; and debt protection matrices 100


8 7.94 7.89
7.58 6.82 6.65
80 7.41 6.91 6.64
6.55 6.72
6 6.23 6.26
D/E Ratio Interest Coverage Ratio NCA/TD 60
4
40
3.5 3.0 0.30
0.9 20 2
2.8 2.8 2.7
0.8 0.8 3.0 0.25 0 0
0.6 0.7 2.5 2.1
0.24

Jun-18

Jun-18
Dec-18

Dec-18
Aug-18

Aug-18
Mar-18

Mar-18
Jan-18

May-18

Oct-18

Jan-18

May-18

Oct-18
Apr-18

Apr-18
Feb-18

Sep-18

Feb-18

Sep-18
Jul-18

Nov-18

Jul-18

Nov-18
0.20
0.22
2.0 0.21
0.15
1.5 0.17
0.13 0.10 Source: Acuité Research, CMIE Source: Acuité Research, CMIE
1.0

0.5 0.05
In 2018, gems & jewellery index dipped 13% whereas sensex rose 5%. This was on account of low
0.0 0.00
2013-14 2014-15 2015-16 2016-17 2017-18 2013-14 2014-15 2015-16 2016-17 2017-18
growth in the industry. Also, due to declining stock prices, P/B ratio has come down.

Source: Acuité Research, CMIE Source: Acuité Research, CMIE


Key Monitorables
Gearing levels have increased marginally due to increase in borrowings. Gearing ratio under ¡¡ The performance of financial markets, monetary policy in key economies and the dollar move-
1 is quite favorable indicating lower debt risk throughout the industry. Increase in interest ex- ment will determine demand for gold in 2019.
pense & short term borrowings has caused both the debt protection matrices to decline. How- ¡¡ Fed Rate Hike – US Federal Reserve has indicated that they will reduce the pace of US rate
hike & this may have positive effect on gold for 2019.
ever, the ratios still stand favorable.
¡¡ Interest Rates - Gold is sensitive to higher interest rates because they boost the dollar, making
bullion more expensive for buyers using other currencies.
¡¡ Exchange rates – An increase in the ₹/$ rate will increase the price of gold & jewellery in the
domestic market causing demand to decline.

78 79
Acuité Ratings & Research India Credit Risk Yearbook-2019

MINING Industry background and characteristics


India is well endowed with natural mineral resources, as India produces 95 minerals. The
mining sector is one of the important sectors in India’s economy. GVA stood at about USD 58
billion in FY18 with growing CAGR of 6.21% in last 6 years. India is the 3rd largest producer of
coal and 4th largest producer of Iron ore producing 689 MT and 210 MT in FY18, respectively.
Domestic Iron ore and Coal production forms backbone for Indian Manufacturing and Power
sector. India has large number of small operational mines, 1531 mines operating in FY18 as

Top 4 states contribute to ~60% of the


total production

Rajasthan
against 1508 in FY17.
20.3% Odisha
29.8% Andhra Pradesh
Chhattisgarh
17.8%
Karnataka
6.1%
Telangana
7.8% 9.5%
8.8% Others

Source: Ministry of Mines

Rating distribution: 55.2% of portfolio is investment grade


29.3%

24.1% Upgraded: 10.4%

15.5%
MCR:
Risk category: Moderate 10.3%
12.1%
Downgraded: 8.6%
1.03

5.2%
Mining industry in India is in moderate risk category on account of volatile commodity prices, 3.4% Default: 15.5%
high regulatory risk in India and high level of logistical and supply bottlenecks. Over the medi- 0.0%
um-term, regulatory risk and infrastructural challenges will continue to put downward pressure
on production levels. AAA/A1+ AA A BBB BB B C D

Source: Acuité Research, CMIE

Credit profile of the industry is stable? with 55% of the portfolio in investment grade and over
15% of the companies are currently in defaults. Industry also has healthy level of portfolio in
A and above category.
Defaults are distributed across the sub-segments, no single segment is specifically in dis-
tressed levels. Also, MCR ratio stood over 1 with upgrades outpaced downgrades.

80 81
Acuité Ratings & Research India Credit Risk Yearbook-2019

Robust domestic demand to outpace domestic availability There will be high level of demand for domestic coal compared to costly import; however, coal
production is expected to remain below demand levels in medium term.
of coal and iron ore
Supply side pressures expected to ease out, but remain under
Revenues saw a healthy recovery backed by Revenues grew at CAGR of 4.7% in last
improved realisations 4 years, however sector had taken suboptimal levels in the short run
a dip in FY17 when price of Lump ore
Mines can be segregated by iron ore Odisha leads in Iron ore production in India
Net Sales (’000Rs. Cr) Growth dropped over 40% from Rs. 2983/tonne
800 20% quality (Fe content). Mines in Odisha and
in Sep-2015 to Rs. 1702/tonne in Sep-
Chhattisgarh generally produce higher
700 633 15% 2016. However, the sector has recov-
632 grade iron ores with ≥60% Fe content,
ered well as price of Iron ore improved
600 560 564 but are plagued by inventory pile-up is-
527 13.0% 10% on healthy rate in FY18 on account of 7%
12.0% sues due to insufficient evacuation logis-
500 healthy demand from steel sector. We
6.3% 5% tics. Mines on the western side - Goa and Odisha
400 expect revenues to grow at 5-6% till 14%
Karnataka - are of lower grade, with ma-
0% FY20 on moderate volume and contin- Chhattisgarh
300 jority having 55-60% Fe content, and suf-
ued expectation of increase in price of
-5% fer from excessive regulatory influence. 11% 51% Jharkhand
200 Iron Ore as the mining at Donimalai in
100 -10% Karnataka has been stalled. Supreme Court order cancelling all 88 Karnataka
-10.8% mining leases in Goa since Q1 FY 2018- 17% Others
0 -15%
19, ensured that there would be no near-
FY14 FY15 FY16 FY17 FY18
term supply from the state. National Min-
Source: Acuité Research, CMIE eral Development Corporation (NMDC),
the major producer company, has sus-
Demand recovery expected to continue pended mining at its Donimalai mines Source: Acuité Research, CMIE
(producing 7 MT) in November 2018, fol-
Iron ore is the key raw material for steel production. Growth in steel-intensive sectors such as
infrastructure, automotive, housing and consumer durables is driving demand for steel inter-
mediates. Iron ore production has increased to 201 MT in FY18 with growth of 3.3%. Iron prices lowing the state government’s decision to impose an 80% premium on iron ore sales from the
are expected to remain firm on account of robust domestic infrastructure spending. mine. Domestic iron ore production in FY 2018-19 is, thus, likely to be muted on account of
these issues.
Coal consumption is majorly driven by Power sector, which consumes two-third of countries
coal consumption. Power sector’s estimated requirement of domestic coal is 584MT, however India is the second largest producer of coal with proven reserves of 143 Billion Tonnes (BT).
receipt stood at 538.6 MT in FY18. India’s coal production is highly concentrated with two large state-owned miners - Coal India
Limited (CIL) and Singareni Collieries Company Limited (SCCL), producing over 90% of India’s
Healthy Steel sector demand driving prices higher coal production.

Lump Ore ('000 Rs./Tonne) Fines ('000 Rs./ Tonne)


Coal production by country’s two-largest miners has increased to 458 MT (Apr-Dec 2018), clock-
3.32
ing healthy growth of 7.5%. This has helped the power plants to improve PLF, improved to 61.14
3.06 2.98 (Oct-18) as against 60.7 in FY18, and number of power plants in critical and super-critical fuel
2.91
levels dropped to 23 as on November, 2018 as against 28 as on March,2018.
2.32 2.43 2.29 2.41 2.72 2.62
We expect that supply will remain below the demand levels, production to grow at 6-7% in
2.08 2.19 2.05 2.13 FY19, while exports are expected to remain buoyant with coal supplies expected to fall short.

Policy measures targeted towards shielding the sector from


global shifts
7

17

18

18

18

8
17

17

17

17

17

17

18

18

18

18

Global regulatory changes also affect the industry as iron ore is a commodity. China being the
1

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l1

r1

l1
ar

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ay

ct

ar

n
b

ay

p
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Ap

Ap
No

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Au

Se

Ja

Ju
Fe

Au

Se
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world’s largest iron ore importer, significantly influences global trade and price of the com-
Source: Acuité Research, CMIE modity. A recent Beijing directive to steel mills to modernise or shut down in order to clean up
the country’s air led to greater demand for higher grade ore that will produce lower emissions
Lack of fuel supplies affecting the performance of thermal power plant; as on 31st March, 2018, when processed into steel. It also led to widening of price differentials between ores with 64%
24.6% of power plants were critical in coal supplies. In FY18, power utilities have reported gen- and 58% Fe. The discount for lower grade iron ore widened to 40% below the benchmark from
eration loss of 15.2 BU due to coal shortage. India’s coal import has increased 14.7% in FY19 30% at the start of 2017. These grade-based price differentials are becoming a permanent fix-
(Apr-Oct), since many of power plants are short of coal supplies. ture rather than a blip in the cycle with the demand trend change in China.
82 83
Acuité Ratings & Research India Credit Risk Yearbook-2019

The Government of India has imposed multiple restrictions on steel imports, such as anti-dump-
ing duty and minimum import price, which has also helped the domestic steel production to rise
WC cycles are suboptimal and liquidity issues plague
and boost iron ore consumption. the sector
Government has set target of 175 GW of Renewable Energy Sources (RES) by 2022 with installed Odisha leads in Iron ore production in India
capacity of RES at 72 GW as of June, 2018. In the current pace, RES is expected to grow to 30- Declining net cash accruals over
35% of Installed capacity by 2022. This could impact the demand for coal in long term. the past five years have hampered Debtors Days Creditors Days
the industry’s liquidity profile. On Inventory Days Cash Conversion Cycle

Improved margins on account of healthy price realisation an average, 38% of the total bor-
rowings of the industry were short
250
219
210
term. The cash conversion cycle of 210 193
200
190
PAT Margin EBITDA Margin RoCE the sector has remained above 90
169
days over the past 5 years and 170 158 153
24.0% 157 150
17.1% is mainly driven by high invento-
14.6% ry holding which remained above 148 140
130 132 139
13.1%
12.2% 16.6% 17.3% 60 days over the past 5 years. We 123
expect the working capital man- 90 96
12.5% 96 89 91
agement to be high in the medium 86
6.8%
5.6% term, due to high inventory held by 50
4.3% 3.8%
4.3% companies. FY14 FY15 FY16 FY17 FY18
2.4%

-2.8%
Source: Acuité Research, CMIE
FY14 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18

Equity performance of the sector was volatile over the


FY15

Source: Acuité Research, CMIE Source: Acuité Research, CMIE


past year
Profitability of the sector has improved in FY18 with healthy growth in Iron ore prices, along
with improved capacity Utilisation, which resulted in healthy growth in RoCE. In FY15 some of Index Return Market Return Index PE Times Index PB Times
bentonite and bauxite miners booked negative operating losses. Profitability expected to re- 18
main healthy with expected price realisation in medium term to be healthy. 16

Industry slightly deleveraging and protections metrics 12


13

improving 10

D/E ICR NCA/Total Debt

1.08 1.9 1.6 1.1 1.5 1.4


3.5 0.04
0.87 0.87 3.0 0.3 2.9 FY14 FY15 FY16 FY17 FY18
0.81 3.1 2.8

18
18
18
18

8
7

17

17

l1
2.96

l1

1
0.03

v
p
ay
n
p

ar

Ju
v
Ju
2.5

No
Se
Ja
No
Se
0.3

M
M
0.65
2.0 0.3 0.20 Source: Acuité Research, CMIE Source: Acuité Research, CMIE
1.5 0.2
1.0
1.1 0.01
0.5
Sector returns have been highly volatile. In first half of 2019 it outperformed the market, how-
0.0 ever returns dropped drastically in second half. Valuation remains in par with market, P/E and
0.0 0.0
FY14 FY15 FY16 FY17 FY18 P/B ratio’s valued in line with market.
FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Gearing levels have improving constantly over last 3 years on account of healthy profitability
and lower levels of debt funded capex undergone during this period. Debt-protection metrics re-
mains healthy. Gearing is expected to further decrease as the industry remains cautious while
Debt-protection metrics are expected to be range bound in near term.
84 85
Acuité Ratings & Research India Credit Risk Yearbook-2019

TO U R I S M A N D H O S P ITA L IT Y
Key Monitorables
¡¡ Iron ore sector depends upon demand from steel sector, exports from India has dropping in
FY19 on account of various tariff impositions in US and Europe and domestic demand upon
spending on Infrastructure. In medium term, infrastructure spending and rising protectionism
would shape the demand for iron ore.

¡¡ Supreme court order on closure of mines in Goa and NMDC has suspended mining at its Don-
imalai mines impacting the supply of iron ore. How supplies will turnout in 2019 under higher
regulatory risk remains to be watched.

¡¡ Coal supplies are expected to remain subdued on infrastructure issues and lower levels of new
mines have opened. How the supply bottlenecks are to be sorted remains key moniterable.

Risk category: Moderate


The hospitality industry had witnessed a relatively high level of stress in the period FY14-FY16
but the current risk outlook is moderate backed by improving profitability and debt protection
metrics. Acuité believes that the credit challenges in the sector would subside on account of
healthy demand outlook that can outpace new supplies with resultant improvement in Occu-
pancy Rate, Average Room Rate (ARR) & Revenue per Available Room (RevPAR).

86 87
Acuité Ratings & Research India Credit Risk Yearbook-2019

Industry background and characteristics Healthy demand expected to outpace supplies


The Indian Hospitality sector is one of fastest growing service sectors in the country. The sec- Occupancy rates have seen continuous Revenues have seen a strong growth of 17%
tor’s direct contribution to GDP stood at USD 91.3 billion (3.7% of GDP) and total contribution improvement over the last 5 years with CAGR over the last 5 years
to GDP stood at USD 234 billion in 2017 (8.9% of GDP). It also employed 26.2 million direct average estimated to be 66-67% in FY
employees in 2017. 18 driven majorly by the premium seg- Net Sales Growth (%)
ment. The low-end segment saw a slight 16000 100%
The sector’s demand remains primarily driven by domestic tourists with a share of 87% of 13,506
decline over the same period. The mid- 12,723
total tourist expenditure and the remaining 13% is contributed by foreign visitors spending in 12,413 80%
range hotels have seen modest growth
2017. As per ministry of tourism, Domestic Travel Visits (DTV) grew by 2.3% with 1652.5 mil- 12000
driven by increasing acceptance in the
lion visits, while Foreign Tourist Arrivals (FTAs) stood at 10.04 million in 2017 and 9.37 million 56.3% 60%
Tier II and Tier III cities.
in 2018 (Jan-Nov). In terms of segment-wise spending leisure travel spending contributes to 7,940
8000 7,309
94.6% of spending, while business travel spending contributes 5.4%. The average room rates paint a con- 40%
trasting picture. From FY14 to FY16, Av-
erage Room Rate (ARR) had remained 4000 20%
5.4% stable due to declining demand against 8.6%
6.2%
2.5%
12.8% increasing capacity additions. 0 0%

Revenue per Available Room (RevPAR) FY14 FY15 FY16 FY17 FY18

subsequently saw strong growth post FY


16 as occupancy rates improved. Source: Acuité Research, CMIE

87.2% 94.6% Over the long term, we expect the demand driven growth to continue as disposable in-
comes rise steadily and the economy picks up pace paving the way for higher leisure and
corporate travel.

Domestic Visitor Spending Foreign Visitor Spending Leisure Spending Business Spending Occupancy Rates have seen a robust growth ARRs have seen modest 5% CAGR growth

Source: Ministry of Tourism Occupancy rate (%) Average room revenue (Rs)

66.3

Rating distribution: 58% of portfolio is investment grade 63.9


5,76
5,48
62.1 5,12
4,78
28.5% 61.3 4,72
4,50
Upgraded: 3.8% 60.4
60.4

20.0% 19.2%
MCR:
Downgraded: 6.2%
13.8% 0.9 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
(E) (E) (E) (E)
7.7% 8.5%
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
Default: 7.7%
1.5% 0.8%
India’s tourism sector witnessed healthy growth of Foreign Tourist Arrival (FTA) over last 5
AAA/A1+ AA A BBB BB B C D
years, FTA stood at 10.4 million in FY18, growing at CAGR of 9.3% during this period. FTA is
primarily driven by growing leisure, holiday and recreational segment. India attracts healthy
Source: Acuité Research, CMIE levels of medical tourism from Bangladesh and Afghanistan due to low cost destination.
However, implementation of GST on hotels has made India as a pricier destination. India is
Industry has witnessed more downgrades than upgrades in 2018 with MCR at 0.9. Upgrade and
facing competition for medical tourism from countries such as China and Thailand.
Downgrade are distributed throughout the rating scale, with Upgrade/Downgrade not concen-
trated to a particular rating group.

88 89
Acuité Ratings & Research India Credit Risk Yearbook-2019

Growing foreign tourism in India On the supply side, the sector has seen a cau-
tious movement with net additions seeing a de-
Profitability has seen steady improvement from the lows
FTA (in mn) Earnings from FTA (USD Bn)
cline over the last few years, especially in the of FY14
20.4 28.7 premium segment. Most of the additions came
23.8 from mid-range hotels as they expanded their
RoCE 7.7% PAT Margin EBITDA Margin
21.4 presence in tier II and tier III cities. This trend
is expected to continue as the room-sharing 6.1%
18.2
economy and boutique hotels make inroads in 5.4%
5.0% 25.9%
the Indian hospitality space. This would drive 4.5% 25.2% 23.2%
9.1
10.4 further capacity additions with supply expected 18.1%
19.7%
7.8 8.2
7.1 to grow at 3-5% CAGR over the medium term.
However, the growth in demand is expected to -3.6%
-2.4%
outpace supply growth and we expect occu-
FY14 FY15 FY16 FY17 FY18
pancy rate to reach 69-70% in medium term. -16.8% -5.5% -0.4%
The growing reach of the digital travel plat- FY14 FY15 FY16 FY17 FY18
FY14 FY15 FY16 FY17 FY18
Source: Acuité Research, CMIE
forms is clearly helping to bridge the gap be-
tween the supply and demand in the hotel industry. Online sale of travel bookings in India currently Source: Acuité Research, CMIE Source: Acuité Research, CMIE
stand at about Rs. 150 Cr. The sector has witnessed a steady improvement in profitability metrics on account of healthy
However, competition is also emerging from new business models such as Airbnb, also known as growth in occupancy rate and ARR, however profitability is highly skewed with 50% of companies
home stay, among others. Airbnb currently has about 32,000 Homestays (70,000 rooms) in India still making losses in FY18. The profitability has improved majorly for the premium hotels on ac-
clearly a major threat to the sector, which currently has about 1.3 lakh rooms. A major driver is count of lower room additions over the last 3 years compared to the players in the mid and low
that India’s millennials are leaning towards uncharted travel and experiences rather than touristy range segments.
locations.
Cautious approach to debt funded capex and improved
Room additions have seen a lull phase profitability have seen improved debt protection matrices
11,072 Capacity additions (room)
The industry has been deleveraging DPM have seen a gradual improvement
9,770
8,583
9,279 since FY 16 post FY 14 Lows
8,153 8,274
7,252
7,179 Interest Coverage Ration (Times)
0.9 0.9 0.9 NCA/Total Debt (%)

0.8 0.8 1.8 1.8


1.6
1.4
1.3
9.6%
8.2%
5.5%
2.4%
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
-5.4%
Source: Acuité Research, CMIE
FY14 FY15 FY16 FY17 FY18 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18

Source: Acuité Research, CMIE Source: Acuité Research, CMIE


Regulatory/ policy impacts
The debt levels remained under control with industry level D/E improved to 0.76 times, as the
The levy of GST on hotel stay has been simplified and it is currently based on tariff charged in- industry focused on improving occupancy rates before venturing into capacity expansion.
stead of any segmentwise tariff. Accordingly, hotels and lodges with a tariff below Rs. 1000 a Debt protection matrices are currently at optimal levels. The metrics have been improving due
day will be exempted from GST, while those with a room rate between Rs. 1000- 2,500 will be to lower debt funded capex at industry levels, improving occupancy rate and higher yields
taxed at 12 percent, rooms with Rs. 2,500-7,500 tariffs attract 18% GST; five star and luxury and steady profits adding to cash accruals. Gearing is expected to remain under control as
hotels (Above>7,500) will be taxed at 28 percent. This will reduce the burden on mid-budget capacity addition in medium term is not expected to outpace demand, healthy occupancy rate
travelers and help in improving occupancies and ARR. would also help the industry to maintain debt protection metrics.
90 91
Acuité Ratings & Research India Credit Risk Yearbook-2019

The industry has optimal liquidity and low WC requirement F E R R O U S M E TA L S


Net cash accruals of the sector has been Debtors Days Creditors Day
Inventory Days Cash Conversion Cycle
improving from NCA/Total Sales of 8% in 13
FY14 to 9% in FY18 on account of improv- 74 76
77
ing occupancy rates and healthy ARR. On 74 60
70 52 63
an average 19% of the total borrowing 57
1 32
3
of the industry were short term. The cash 1
0 0 0 0 0
conversion cycle of the sector is at healthy -2
levels ranging between 0-13 days due to -4

low level of inventory requirements and FY 14 FY 15 FY 16 FY 17 FY 18


debtor level. We expect the cash working
Source: Acuité Research, CMIE
capital management to be maintained at
the same levels due to lower inventory, debtors and creditors in the segment.

Performance of the sector in the equity markets have been


dismal in the past year

Index returns BSE 500 returns Sector P/E (Times) Sector P/B (Times) 5
200

156.3 4
150 2.8 3.4
3.1
2.4 3
100
113.5 2
69.9
1.7
50 1

0 0

Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 2013-14 2014-15 2015-16 2016-17 2017-18
Risk category: Moderate to Low
Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Hotels & Tourism Index underperformed broader market in 2018. P/B ratio remained on higher Ferrous metals sector has witnessed a drop in commodity price, below average capacity
side at 3.37 times and the trailing P/E ratio stood at ~70 times in FY18, despite correction from utilisation and cheaper imports from China over the period FY 14- FY16. However, the sector
FY17 Highs of 156 times. has seen a subsequent improvement in risk profile because of improved price realisation in
the last two years with government imposing anti-dumping tariffs to support domestic pro-
duction and a healthy growth in infrastructure development activity.
Key Monitorables
¡¡ Tourism industry is highly sensitive to event risk such as Natural disaster, Terror attacks and
Health related warnings (Kerala floods resulted in occupancy rate dropping to as low as 10-20%
in various parts of the state).

¡¡ Business tourism contributes only 5.4% of total tourism revenue as against worldwide average
of 22%, this segment could offer immense potential for growth. However, ability to tap into this
segment depends upon the economic outlook, government reforms, ease of doing business
environment and stability of the government, among others.
92 93
Acuité Ratings & Research India Credit Risk Yearbook-2019

Industry background and characteristics Demand recovery expected to continue over the short term
Ferrous metals, contains iron as the base metal, is the most commonly used metal and 4th Sector showing signs of both price and volume recovery
most common element available on the earth. Steel is the most commonly used ferrous metal,
containing carbon content of less than 2%. India is the third largest consumer and second Net Sales (Rs. Cr) Growth Average Steel Price (Rs./Tonne)
largest producer of steel in the world. It consumed 90.7 metric tonnes (MT) and produced 105
400 20% 60000
MT of steel as of FY18. 338 50,216
350 15% 46,755 48,531
15% 15% 50000
286 296 294 41,664
Indian steel sector contributes approxi- 300
256 10% 40000 38,579
China leads in global steel production mately 2% of GDP. Sponge iron is pro- 250
5%
200 3% 30000
duced through direct oxidation of iron 0
150
ore, used in manufacturing steel through -5%
20000
100
China secondary route. India is the largest pro- 50 -10% 10000
ducer of sponge steel, 24 MT of Sponge 0
-13%
0
Japan -15%
29.5%
iron was produced in FY18. FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
India
49.2% Source: Acuité Research, CMIE Source: Acuité Research, CMIE
USA
4.2% Revenue has grown at CAGR of 4.25% in last 4 years. The revenues took huge dip in FY16, when
Russia global commodity prices crashed on fear of china slowdown. Average Selling Price (ASP) had
4.8% dropped over 17% during the same period. ASP in FY18 remained below the peak attained in FY14.
Others
6.0% Revenue growth is driven through increased quantity sold, while growth remained flat.
6.2%
Sector is witnessing price recovery and healthy utilisation
Source: Acuité Research, CMIE Steel consumption grew at 4.3% CAGR to 90.7 MT in FY 2018 from 73.5 MT in FY 2013, which is less
than half of 8.9% CAGR recorded during FY07-FY12. During this period, gross fixed capital forma-
tion to GDP (indicator of addition of physical assets in the economy) also came down to 28.5%,
Rating distribution: 48.5% of portfolio is investment grade compared to 34.3% in FY 2012.

Construction & Infrastructure remains the largest consumer of steel


32.8%
Upgraded: 14.1% 2.9% Infrastructure is the largest user segment with
2.9% more than 60% share in the overall steel con-
25.1%
sumption, in union budget 2018-19, infrastruc-
MCR: 10.1%
Downgraded: 6.4%
1.11
ture allotment has increased by 20.9% to Rs.
12.8% 6 lakh crore, these measures are expected
9.8% 10.2%
8.2% 22.1% 62.0% to provide a positive push to domestic steel
Default: 10.2% consumption. Engineering segment primari-
0.8% 0.3%
ly includes Capital goods. Consumer goods
AAA/A1+ AA A BBB BB B C D
segment is expected to grow rapidly driven
by high growth expected from Gross Fixed
Source: Acuité Research, CMIE Construction and Infrastructure Engineering
Capital Formation in FY19 and increasing dis-
Automotive Other Transport Others
posable income.
Credit profile of the companies in the industry is stressed, only 48.5% of the portfolio is in-
vestment grade and nearly one-third in B category (High risk). However, automobile sector’s demand, one of
Sponge iron segment is highly stressed with 42% of the portfolio falling under B Category, Source: National Steel Policy 2017 large consumer of Steel (Flat steel) remained
while only 37% of portfolio is in Investment grade. However, the sector is in recovery mode
with upgrade outpacing downgrade after a period of continuous downgrades, MCR stands subdued on account of below average festival season, high fuel price, non-availability of cred-
at 1.11 times. it, Kerala floods and increased insurance cost affecting consumer sentiment. In spite of weak
FY19, the sector is expected to grow at double-digit rate on improving liquidity position, lower
4-wheeler penetration and rising disposable.
94 95
Acuité Ratings & Research India Credit Risk Yearbook-2019

Increasing domestic steel consumption (MT) Price of imported coking coal from Australia and domestic iron ore has increased
over last 1 year
Infrastructure is the largest user segment with
Domestic Consumption (MT)
more than 60% share in the overall steel con- Coking Coal-Import Price ('000 Rs./Tonne) Iron Ore ('000 Rs./Tonne)
84.0
90.7 sumption, in union budget 2018-19, infrastruc- 5.2 5.3
81.5
73.5 74.1 77.0 ture allotment has increased by 20.9% to Rs. 15.5 4.6 4.8
4.3
4.0 4.1 3.9 4.2 4.2
6 lakh crore, these measures are expected to 13.0 12.4
14.0 13.5 13.3
11.6 3.3 3.5
provide a positive push to domestic steel con- 10.8
sumption. Engineering segment primarily in- 6.7
5.7 5.9
cludes of Capital goods, Consumer goods ex-
pected to grow at 6-7% on account of Gross
Fixed Capital Formation is expected to grow by
FY13 FY14 FY15 FY16 FY17 FY18 12% in FY19 and increasing disposable income.

Mar–16

Jun-16

Mar-17

Jun-17

Mar-18

Jun-18

Jan-18

Mar-18
Apl-18

Jun-18

Jul-18
Sep-16

Dec-16

Sep-17

Dec-17

Sep-18

Nov-17

Dec-17

Feb-18

May-18

Aug-18

Sep-18
Oct-18
Source: National Steel Policy 2017 However, automobile sectors demand, one of
large consumer of Steel (Flat steel) remained subdued on account below average festival season, Source: Acuité Research, CMIE Source: Acuité Research, CMIE
high fuel price, non-availability of credit, Kerala floods and increased insurance cost has affected
consumer sentiment. In spite weaker FY19, sector is expected expected to grow at double-digit The DRI-EAF/IF process requires non-coking coal/natural gas, sponge iron or scrap to make
rate on improving liquidity position, lower 4-wheeler penetration and rising disposable. crude steel. On the back of abundant availability of non-coking coal in the country, various
coal-based sponge iron units have mushroomed across key mineral-rich pockets of the coun-
India’s steel export has risen continuously in FY17 and FY18 resulting in India becoming a net ex- try. Raw material cost comprises 70-75% of the total production cost of steel.
porter. However, in FY19, India’s steel export has been severely impacted as exports dropped by
39% to 4.7 MT in FY19 (Apr-Dec) on account of imposition of various tariffs by US and Europe. Go- Government initiatives to support local producers
ing forward, India’s export is expected to remain subdued on account of slowing growth around
the world and rising protectionism. To provide an impetus to the domestic steel industry, a policy giving preference to domesti-
cally manufactured iron and steel products in all government tenders, has been introduced.
Also, steel makers importing raw materials or intermediate products are given additional
benefits, by adding minimum of 15% value to the product. 100% foreign direct investment is
permitted in the industry, attracting global players to set up their base in the country. To pro-
mote the steel industry, there is no export duty on finished steel products but a duty of 30%
has been levied on export of iron ore. Further, the duty on import of capital goods required
for setting up a steel plant is nil.
Globally, rising protectionism negatively im- Capacity additions outpace production
pacting steel exports India has imposed anti-dumping duties of up to USD 185.5 for five years on certain varieties
of Chinese steel to guard domestic players from cheap Chinese imports.

Exports (Million Tonnes) Crude Steel Production (MT) Government’s focus on lowering carbon emissions might pose a regulatory risk to the existing
Exports as % of Total Production Crude Steel Installed Capacity (MT) BF-BOF and DRI-IF route players, where carbon emissions are higher compared to the DRI-
9.4% 128.3
138.0 EAF route. De-allocations of iron ore and coalmines, cancellation of contracts, and delays in
12.0 10.0% 122.0
10.0
8.4%
9.6 109.9 land acquisition and environmental clearances are also a major regulatory risk.
102.3 103.1
6.8% 7.3% 6.3% 8.2 8.0% 97.0
89.0 89.8
98.0
8.0 5.9% 78.4 81.7
6.0 6.0%
6.0 5.4 5.9 4.5%
4.1 4.6 4.0% Improved margins on account of healthy price realisation
4.0
2.0 2.0%
0.0 0.0% PAT Margin EBITDA Margin ROCE
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY13 FY14 FY15 FY16 FY17 FY18
16.2% 9.3% 9.3%
(Apr-Dec) 15.3% 15.8% 8.1%
13.8%
6.0%
Source: Acuité Research, CMIE Source: Acuité Research, CMIE 9.5%

The BF-BOF process mainly requires iron ore, coking coal and limestone. India has iron ore re- 3.2% 2.2%
2.5%
serves for manufacturing of steel. However, India lacks sufficient domestic supply of quality coking FY16 FY17 0.5%
coal, thus producers are heavily dependent on imports, around 85% of the requirement of manu- FY14 FY15 FY18 FY14 FY15 FY16 FY17 FY18
-1.0%
facturers is met through imports.
-6.8%

Source: Acuité Research, CMIE Source: Acuité Research, CMIE


96 97
Acuité Ratings & Research India Credit Risk Yearbook-2019

Industry profitability has improved on account of improved price realisation. ASP has
risen by 17% coupled with improved asset utilisation has enhanced industry fortunes. In- Sector has outperformed broader Index
dustry clocked operating margin of over 20% in H1,2019 as realisation has improved fur-
ther; however in 2nd half, the price of key raw material, which is iron ore, has increased
Index PE Index PB
significantly. This resulted in operating margin to range between 16-17%. Going forward, Index Return Market Return
the industry margin is expected to remain stable. 29.16
30 1.8
1.74
19.83 1.6
20
Debt levels and protection metrics going back to pre
11.42 1.4
10 1.24
FY16 FY17 FY18 1.2
FY16 levels 0
-10 FY13 FY14 FY15 1.0
0.8
-20 0.79 0.86 0.8 0.72
-17.78 0.6
Industry debt levels remains elevated ICR improved along with profitability -30 0.4
-40 0.2
ICR NCA/Total Debt -50 -43.87 -43.23

Ju 18
Ap 18

Se 18
M 18

O 18

De 18
Fe 18

18
M 18

No 18
Ju 18
0

Au 18
D/E

Se -17

De 17
Ja -17
O 17
No 17
Au 17

g-
r-

p-

v-
n-

c-
b-

n-

-
l-
v-
-

ar

ay
l-

ct
p
g

c
ct
2.5 0.14

Ju
1.3
1.2 0.12 0.12
1.1 2.0 2.0
1.0 1.0 1.9 0.10
2.1
0.11 1.7 Source: Acuité Research, CMIE Source: Acuité Research, CMIE
1.5 0.10 0.08
0.07 0.06
0.9
1.0 0.04 Sector has performance outperformed broader market in 2018. Trailing P/E stood at negative
0.02 levels. The index is trading at well above the book value, majorly due negative profits resulting
0.5
-0.01 0.00 in deterioration in network, however during the same time index outperformed market.
0% -0.02
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18

Key Monitorables
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
¡¡ Exports from India has dropped in FY19 on account of imposition of various tariffs in US and
Gearing level in FY16 spiked on account of losses incurred, eroding considerable level of Europe. Raising protectionism across the globe could negatively affect India’s exports. FY 20
net worth and increased capacity installed by 13MT, which was primarily debt funded.
could be major year in terms of how global trade to shaped in future.
However, gearing levels have moderated with debt levels reduced slightly and improved
profitability. Debt protection metrics also improved after FY16 low. ¡¡ Sector primarily depends on nation’s Infrastructure spending and Consumer spending (Con-
sumer goods and Automobile). Private investment and automobile sales pickup would be key
High inventory levels put a negative skew to the liquidity monitorables.
profile and WC requirements of the sector
The industry currently has poor liquidity profile. Marked by volatile net cash accruals
over the past 5 years ranging from below 1% in FY16.

Debtors Days creditor Days The cash conversion cycle of the sector
Inventory Days Cash Conversion Cycle is on a declining trend since 69 days to
110 99 days, it is mainly driven by high in-
107
101 98 ventory days that ranged between 88-
99
91 88 110 days over the past 5 years. Improv-
84 81 ing profitability and increasing cash
69 accruals should help improve the sce-
56 56 57 58 57 nario in the short run.
48
38 40 41 35

FY 14 FY 15 FY 16 FY 17 FY 18

Source: Acuité Research, CMIE


98 99
Acuité Ratings & Research India Credit Risk Yearbook-2019

F E RT I L IZ E R Industry background and characteristics


The fertiliser industry is considered as an allied activity of the Agricultural sphere. Farming and
ancillary activities contribute about 1/6th to India’s GDP. India is the second largest consumer of
fertilisers in the world. India also ranks second in the production of nitrogenous fertilisers and
third in phosphatic fertilisers, whereas the requirement of potash is met through imports since
there are limited reserves of potash in the country. In India, the most widely used fertiliser in the
Nitrogenous category is Urea, while DAP and MOP for Phosphorus and Potassium, respectively.
The sector has grown at a CAGR of 3% between FY13 – FY18. The industry is highly regulated
under the Fertilizer Control Order, 1985.
National Fertilizers Limited, Fertilizers and Chemicals Travancore Limited (FACT) and Rashtriya
Chemicals & Fertilizers Limited (RCF) are the leading PSUs in the sector. Chambal Fertilizers,
Deepak Fertilizers, Gujarat State Fertilizers & Chemicals (GSFC) and Zuari Industries Limited are
the top private sector companies. IFFCO and KRIBHCO are the two leading units in co-operative
sector. The sector may witness growth on account of the increasing FDI inflow and demand in
agriculture sector coupled with government’s aggressive focus on food and allied industries.

Rating distribution: 64% of portfolio is investment grade


36%
33%
Upgraded: 7.7%

MCR:
Downgraded: 5.1% 1.03
13%
10%

5%
3% Default: 2.6%

AAA AA A BBB B D

Source: Acuité Research, CMIE

Risk category: Moderate to Low Credit ratings for fertilizer companies are skewed with 64% of portfolio in investment grade,
while 2.6% is in default. All upgraded entities entered the investment grade reducing the over-
The positive aspects in the sector such as improving profitability, favorable D/E ratio and debt all stress on the sector. MCR, thus, stands at a comfortable 1.03.
protection matrices are offset by a large amount of unpaid subsidy and freight bills, resulting
in working capital pressures and high interest costs. Demand expected to see Revenues heading towards FY 13 levels
modest growth over the
medium term with supply
Sales (₹ in Cr) Sales Growth

remaining stagnant 76000


74000
74463
73219
15%
9.6% 72798 10%
72000
Post lows FY 16, the industry has seen an 70000 69356
5%
uptick driven by increased demand due to 68000 66747 4.7%
66000 0%
good monsoon, increase in rural income -1.7%
64000 62684
and growth in the agriculture sector. Phos- 62000 -6.5%
-5%
phatic fertilisers growth was driven by de- 60000 -9.7% -10%
cline in the high inventory levels post FY 17. 58000
56000 -15%
Consumption of phosphatic fertilisers had
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
dipped on account of sharp rise in prices
post deregulation in FY 11. Source: Acuité Research, CMIE
100 101
Acuité Ratings & Research India Credit Risk Yearbook-2019

Demand for nitrogenous fertilisers was impacted by the mandate for using neem based Urea Government policies continue to work around increasing reach and
and is expected to remain modest going ahead.
managing costs with tight control on production and prices
During FY17, food grain production touched a record level of around 275 MT as a result of good
monsoon and ample water reserves. It is expected that demand for urea might increase by The New Urea Policy (NUP), 2015 aims to rationalise the subsidy burden by maximising indigenous
about 7-8 MT over the next 5-7 years as a result of huge growth in agricultural sector. Increase
production of urea, end its import and promote energy efficiency of units.
in rural income by means of various farmer welfare schemes, such as, MSP and farm loan waiver
is expected to provide further impetus to the sector. Under NUP 2015, target energy norms with token penalties have been announced by government
Demand risk is moderate as growing awareness among farmers of benefits of balanced use of to achieve energy efficiency by plants. The industry is showing its incapability to implement it,
fertiliser on decreasing arable land shall fuel the demand for phosphatic fertilisers. Favorable since these energy saving projects have high capital cost with long payback period.
government policies such as DBT to support the fertilizer industry and increased distribution
network shall boost growth in the industry. Due to fall in raw material prices, DAP demand and The recently launched Direct Benefit Transfer (DBT) scheme and 100% neem coating of urea will
production is likely to increase improving profitability of manufacturers in short-medium term. keep in check subsidy pilferage and illegal diversion of urea.

About 50% demand of phosphatic fertilizers is being met indigenously and rest is imported from Government aims to ensure timely and adequate quantity of fertiliser at affordable prices to
various countries including Canada, China, Jordan, Morocco, Russia, Saudi Arabia and USA. farmers. Around 2000 model fertiliser shops under the name ‘Kisan Suvidha Kendras’ have been
opened to provide quality fertilisers at genuine rates along with other soil related services. All
Focus towards self-sufficiency expected to drive production over the
subsidised fertilisers are mandatorily being sold through point of sale (POS) devices linked with
medium term Aadhar details of farmers to plug loopholes and pilferage in distribution system.
The most widely used primary nitrogenous fertiliser is Urea. India consumes approx. 30 Million The Pradhan Mantri Urja Ganga project and Dhamra LNG terminal aims at augmenting pipeline
Tonne (MT) of urea annually; of which, about 80% is indigenously produced and the rest is im-
infrastructure in the country. In addition, the ‘Gas Pooling Policy’ will align variations in gas prices
ported. In FY18, the total production of fertiliser was 41.4 MT; of which, urea production was 24.2
MT and imports were down by 35% to the tune of 5.48MT. The Government of India is working and ensure supply of gas at uniform prices to units on national gas grid.
towards increasing the production of urea so as to end imports by 2022 and achieve self-suf-
ficiency in urea production.
Profitability of the sector to remain range bound over the
At present, India has around 21 DAP and complex fertiliser units having an annual installed
capacity of 14.6 Million Tonne (MT). In FY18, the industry registered an increase of 7% in DAP short term
production at 4.7MT as against 4.3MT in FY17 on the back of normal monsoon and adequate
water reserves. Also, production of complex fertilisers rose by 3% to 8.3MT in FY18 as compared Profitability seeing an improvement driven by reduced raw-material prices
to79.6MT in FY17. Due to recent fall of raw material prices in the international markets, phos-
phate has become cheaper and is economical to produce DAP rather than importing the end
Operating Margin NP Margin
product. Hence, import of DAP went down significantly. ROCE

The performance in PSUs has been adversely affected due to technological obsolescence and 12.3%
11.7%
shortage/ frequent interruption of gas. Revival of five dormant plants at Gorakhpur, Barauni, 10.9%
10.1% 10.0%
10.1%
Talcher, Sindri and Ramagundam is expected to increase urea production by 7.21MT. 9.3% 9.1% 9.4% 9.1%

Production growth has stagnated over the last few years across segments
3.1%
Production ('000 tonnes) Urea DAP Complex Other 2.3%
1.0% 1.5% 1.5%
in MT
24.5 24.2 24.0 2013-14 2014-15 2015-16 2016-17 2017-18
41,329 41,344 22.7 22.6 2013-14 2014-15 2015-16 2016-17 2017-18
41,244

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

38,539 Input risk is high as heavy dependency on import of raw material and intermediaries make
38,046
7.8 8.3 8.0 8.3 the industry highly vulnerable to volatile prices and forex fluctuations risks. Raw material costs
6.9
4.8 4.7 3.8 4.8 4.4 4.9 4.7 4.4 account for 70-80% of cost of production and are subsidised. Natural gas is the most used
3.6 3.4
raw material to produce urea. Due to limited reserves, the industry has to depend on robust
imports of LNG making India the fourth largest importer. However, fall in global LNG prices
2013-14 2014-15 2015-16 2016-17 2017-18
2013-14 2014-15 2015-16 2016-17 2017-18 and slashing of custom duty by half to 2.5% in Budget 2017 has enabled the industry to majorly
reduce cost of production.
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
102 103
Acuité Ratings & Research India Credit Risk Yearbook-2019

Similarly, during FY18, fall in import prices of phosphoric acid and rock phosphate, the key raw
materials, made it viable to produce DAP rather than import the end product. Significant fall
Equity market performance: Fertilizer Index
in prices of raw material shall result in price drop of DAP increasing its demand in the short underperformed Sensex
term and shall result in higher domestic manufacturing, thus improving profitability levels of Fertilizer SenSex
manufacturers.
In 2018, Sensex rose by 6%, whereas fer-
120.0
EBITDA levels have remained constant at 10-11% over the past 5 years, which is quite favour- tiliser index dropped by 31%. Major rea- 100.0
able. Similarly, ROCE levels are increasing steadily due to improving profitability and reducing
son for drop in index was low growth, high 80.0
debt. The government has been active in clearing subsidies from FY15 onwards. This has ben-
efitted operating and net profit of fertiliser manufacturing companies. government regulations, rise in prices of 60.0
natural gas and high subsidy amount re- 40.0
Gearing and debt protection metrics healthy and ceivable from government blocking work- 20.0

improving ing capital, among others. 0.0

Jan-18

Sep-18
Aug-18
Apr-18

Jul-18
Jun-18

Oct-18
Feb-18

Dec-18
Mar-18

May-18

Nov-18
D/E Ratio Interest Coverage Ratio NCA/TD

1.7
2.5 2.3 14.0% Source: Acuité Research, CMIE

1.2 1.3 1.3


1.1 2.0
1.6 1.7 1.6
1.9 12.5% 12.0%
10.0%
Key Monitorables
9.4%
1.5 8.0%
7.9% 7.2% ¡¡ Huge Subsidy backlog - Large amount of unpaid subsidy and freight bills are pending for
1.0 6.0%
5.7% several years resulting in working capital crunch and heavy interest loss.
4.0%
0.5 ¡¡ Government Regulations - Urea industry in India, being the most government regulated
2.0%
0.0 0.0%
industry in the world, is prone to high regulatory risk. Stifling government control and un-
2013-14 2014-15 2015-16 2016-17 2017-18 2013-14 2014-15 2015-16 2016-17 2017-18 certain policy environment has made the sector unattractive for fresh investments.
¡¡ Shortage and pricing of natural gas - With a fall in Natural Gas prices in domestic and
Source: Acuité Research, CMIE Source: Acuité Research, CMIE international markets, there is a good opportunity for reducing the cost of production of
manufacturing fertilisers.
Gearing has seen a declining trend to reach comfortable levels indicating limited reliance on
¡¡ Sick units and machine obsolescence - Numerous projects have been announced by the
borrowed funds. Debt protection metrics saw a significant improvement in FY 18 backed by
government to restructure sick units and build new plants for capacity addition.
improving profitability and lower debt levels. Here too, the complex fertilisers outperformed
urea, due to decline in input costs. ¡¡ Changes in duty structure - The 5% GST on urea vis-à-vis 18% on input ammonia has led to
an inverted duty structure. It has resulted in liquidity problem in the industry due to blocked
WC cycles improving but still have a long way to go input tax credit carrying high interest costs. Natural gas has been kept out of GST ambit
and is still attracting VAT in various states declining any input tax credit of the sector.
Average net cash accruals are to the Debtors Days Creditors Days ¡¡ Outlook on agriculture sector – Rising agricultural growth will increase demand in fertiliser
tune of 3-6% on revenue over the past Inventory Days Cash Conversion Cycle sector as both the sectors are closely related.
five years. On an average 84% of the to- 150
tal borrowing of the industry were short 130 ¡¡ Changing customer preference towards sustainable organic farming - growing aware-
term indicating need for high liquidity in 130 ness for organic farming and government support to city compost policy will pose a chal-
the sector. The current ratios in the sector 104
109 lenge to chemical fertiliser industry.
110 97 122
was moderate and remained above 0.97 97
90 77
over the past 5 years. 101
69
70 56
The cash conversion cycle of the sector 53 54 66
is on a declining trend from 122 days in 50
51
58 55
48
FY16 to 66 days, it is mainly driven by high 30
debtor repayment cycle. FY14 FY15 FY16 FY17 FY18

The major reason for stretch in collec-


tions is the need for various inspections Source: Acuité Research, CMIE

to clear payments by the government. We expect the liquidity profile and cash conversion
cycle to remain stressed over the medium term.
104 105
Acuité Ratings & Research India Credit Risk Yearbook-2019

CHEMICALS Industry background and characteristics


Chemical industry of India is the 3 rd largest in the Asia and contributes to over 2%
of India’s GDP. India is one of the leading dye suppliers. India’s production of Major
chemicals was to the tune of 10234 thousand MT in FY 17 and 5307 thousand MT in
FY 18 (till Sept), witnessing healthy growth. India’s exports of Chemical products (Ex-
cluding Pharma and Fertilizers) stood at 99549 thousand MT 2017-18 (till September)
witnessing growth of 9% over previous year. The major segments of chemical prod-
ucts we are considering are Plastic Products, Organic Chemicals, pesticides, Dyes &
Dyestuffs and Inorganic Chemicals.

Rating distribution: 67% of portfolio is investment grade

23%
17%
Upgraded: 10.7%
25%
24%

MCR:
Downgraded: 8.5% 1.03

6%

2% 3.4% Default: 9.6%


1%

AAA/A1+ AA A BBB BB B C D

Source: Acuité Research, CMIE

Credit profile of the industry is healthy with 67% of portfolio in investment grade, and only 3.4%
of the portfolio is in default, one of the lowest among the sectors in the country.
Pesticide and Polymer companies have healthy credit profiles with 90% and 70% of the port-
folio in investment grade, respectively. These segments do not have any default, further
strengthening the credit profile of these segments. Organic segment’s credit profile is in line
Risk category: Moderate to Low with industry levels. However, Plastic segment is stressed with 31% of the companies in B cate-
gory (High Risk) and only 59% of the companies is are in investment grade.

Sector has a healthy financial risk profile along with growing export levels. However, challenges
remain in the polymer (plastics) segment with high level of regulatory risk. Acuité expects the Steady and healthy growth may not be a norm for the
sector risk profile to deteriorate marginally due to an expected reduction in volumes and real-
izations in the plastic segment. sector going ahead, driven by headwinds to the plastics
segment and lack of investments
Sector has witnessed healthy revenue growth at 8.4% CAGR over last four years. Key drivers
were Polymers, Organic chemical and pesticides (Accounting for one-fourth of industry reve-
nues), which grew at CAGR of 25%, 24% and 9% respectively over last 4 years.
Plastic segment, the largest of chemical segment (one-third of total value) witnessed moder-
ate growth of 4.2% CAGR driven by lower growth from consumer plastic segments. However,
growth is expected to remain stagnant going ahead due to ecofriendly Govt. regulations and
policies and low demand.

106 107
Acuité Ratings & Research India Credit Risk Yearbook-2019

Healthy revenue growth and production levels Organic chemicals segment production has witnessed stagnant growth, growing at CAGR of
1% over last 4 years. Purified Terephthalic Acid (PTA) forms significant contribution to organic
chemicals production, which is used in manufacturing of Polyester fiber, domestic production
Net Sales ('000, Rs. Cr) Growth Polymers (MT) Organic Chemicals (MT) of polyester fiber remains stagnant over the last decade. Organic chemicals such as Metha-
Pesticides (MT) nol and Fatty acids have witnessed negative growth in production.

Prices of Poly Vinyl Chloride (PVC) has Realisation growth in the the sector
200 12.0%
0.19 0.19 0.21 0.21 been witnessing sharp growth as prices remains subdued globally
131.5
145.2 10.0% 0.18 have grown over 25% in 2018 on account
150
105.2
115.5 118.5 8.0% 6.58 6.57 6.80 of increased in polymer exports during Organic Chemicals Pesticides
6.59 6.67
100 6.0% this period. India’s polymer export has Polymers Plastic

4.0% increased more than thrice to 456 thou- 140


50 8.44 8.76 8.90 sand tonnes (Apr-Oct 2018), while prices
2.0% 7.53 7.20
0 0.0%
of PVC had witnessed healthy what??, 120
FY14 FY15 FY16 FY17 FY18 2013-14 2014-15 2015-16 2016-17 2017-18
mainly due to global shortage of PVC.
100
Source: Acuité Research, CMIE Source: Acuité Research, CMIE

80
Domestic Demand for consumer plastics such as bags has witnessed sharp decline in 2018

Jan-18
Sep-14
Apr-14

Jun-18
Jun-13

Jul-15

Oct-16

Aug-17
Feb-15

Dec-15

May-16

Nov-18
Nov-13

Mar-17
on account of higher level of regulation due to rising environmental concerns over the usage
of plastics. The year 2018 had witnessed number of states such as Maharashtra, Tamil Nadu
and Uttar Pradesh imposing plastic ban. Demand for plastic bags remains bleak with number Source: Acuité Research, CMIE
of states lining up for or considering the ban of plastics. Production has dropped over 43% in
FY19 (Apr-Nov), with production stood at 139 thousand tonnes. Low investments in the sector along with input price risks expected
Other plastic segments such as Pipes, Tubes & Conduits of Plastics and Thermoforming prod-
to adversely affect profitability of players in the short run
ucts of plastics hadve witnessed sharp decline in production in 2018 due to declining demand Crude oil is the major raw material for manufacturing chemicals products. Polymers
for plastic products. Pipes, Tubes & Conduits of Plastics production dropped by 12% in FY19 such as High-density polyethylene (HDPE), linear low density polyethylene and PVC are
(Apr-Nov) to 371712 tonnes and Thermoforming products of plastics dropped by 38% to 9271 produced from crude oil from the refineries. These polymers forms as raw material
tonnes in FY19 (Apr-Nov). for plastic materials and prices of polymers follows in line with crude oil movements,
Declining plastic demand across the segments Pesticide exports have seen a sharp up- with high level of correction, signifies any increase in cost is passed on to customers.
tick since FY 16
Prices of crude oil shown high level Closure of Sterlite in Thoothukudi since H1 FY
of volatility in 2018 19, which was supplying 38% of the country’s
Pipes and Tubes Bag Pouches Exports('000,Tonnes) Growth
copper needs, has adversely impacted the
Thermoforming Products industry. Fertilizer, detergent and inorganic
Indian Basket of Crude oil (USD / Barrel)
500 23.6% 25.0% chemical manufactures primarily dependent
410 on supplies from Vedanta were adversely af-
400 380 20.0% 90.0
307
fected. Chemical Industries Association (CIA)
18 18
n- eb-
8 8
r-1 r-1
8
y-1 n-18 l-18 ug-1
8
p-
18 t-18 v-1
8 300 253
285 15.0% 80.0 said the closure of Sterlite has impacted 29
Ja Ma Ap Ma Ju Ju Se Oc No 12.7%
F A
200 10.0%
70.0 chemical companies directly and another
7.8% 7.9% 60.0 150 companies. Due to shortage of copper,
100 5.0% 50.0 price of sulphuric acid tripled from Rs. 4,000
0 0.0% 40.0 in March 2018 to Rs. 12,000 a tonne in June
FY14 FY15 FY16 FY17 FY18 2018, while phosphoric acid prices increased

Jan-18

Sep-18
Aug-18
Apr-18

Jul-18
Jun-18

Oct-18
Feb-18

Dec-18
Mar-18

May-18

Nov-18
Source: Acuité Research, CMIE Source: Acuité Research, CMIE by 50% to Rs. 60,000 a tonne.

India’s pesticide export has grown at a healthy rate of 12.8% CAGR over last four years. Healthy Source: Acuité Research, CMIE
growth in demand is due to revival of demand of pesticides in Brazil and increased exports to
countries such as USA, Vietnam and Bangladesh. India remains as the net exporter of pesticides Dyes and Pigment is a major input cost to textile and leather industry. Dyes & Pigments manu-
with imports being low relative to total consumption. factures witnessed higher raw material cost due to shutting down of units in China and Europe
for pollution control. This has resulted in increase of raw material price in international market.
108 109
Acuité Ratings & Research India Credit Risk Yearbook-2019

Prices of dyes & pigments had in- Number of projects dropped increasing Profitability indicators of the industry have seen a healthy improvement over the last 5 years.
creased over 9% in Dec, 2018 over a EBITDA improved from 12.5% in FY15 to 17.2% in FY18 and RoCE stood healthy over 12% in
year but wasn’t enough to offset the New Project Announced (Rs. Cr) Project Completed (Rs. Cr) FY18. Pesticides segment margins have improved healthily with EBITDA margin improved
rise in input cost resulting in drop in Projects Dropped (Rs. Cr) from 13% to 19%, driven by increased scale of operations and price realisation. We expect
operating margins of many of man- profitability to be stressed in medium term due to raising regulatory issues plaguing the
ufactures. 8,000 7,468
consumer plastics industry.
6,823
7,000
New projects in the consumer plas- 5,598
Healthy long term credit profile
6,000
tics space were called off in FY18 5,000
& FY19, due to rising concern over 4,000
2,894
3,756
3,096
bans and heavy regulations along 3,000
1,934
2,367

with rising oil prices. 2,000


176
800
483 488 632 Gearing ICR NCA/Total Debt
1,000 254 137
0
FY15 FY16 FY17 FY18 FY19 (Apr-Dec) 1.00 0.91 4.0 3.8 0.35
0.86
0.81 3.5 0.32 0.30
Source: Acuité Research, CMIE 0.80 3.0
0.66 3.0 0.25
2.5 2.3 2.5 0.23
Eco-friendly and pro-organic goverment policies have proved 0.60 0.52
2.0 2.1 0.19 0.20

detrimental to the sector 0.40 1.5 0.14 0.14


0.15

1.0 0.10
0.20
Plastic has been witnessing high level of regulatory scrutiny thanks to rising environmental 0.5 0.05
concerns over the usage of plastics. In 2018, Maharashtra, Tamil Nadu and Uttar Pradesh 0.00 0.0 0.00
banned the use of plastic bags disrupting the market for the manufacturers. Many states and FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Municipal Corporations are expected to implement ban on plastics, in some form.
The Supreme Court has agreed to examine a plea seeking ban on 85 pesticides that are be- Source: Acuité Research, CMIE Source: Acuité Research, CMIE
ing used in India. These pesticides have been banned in other countries on the grounds that
they pose health hazard but have been allowed to be used in India. Supreme Court issued a Gearing remains healthy and improved over last 4 years on account of healthy profitability
notice to the center to empowering state government for prohibition and restriction related and conservative approach on capacity addition. Debt-protection metrics keep improving with
to pesticides. healthy cash accruals and lower debt levels. With lower investments expected in the near-
Government is drafting integrated policy for chemical and petrochemical segments. This in- term, gearing is expected to improve. Lower expectations of profitability will keep the debt
tegrated policy is expected to provide separate policy framework for petrochemicals and protection metrics range bound.
chemicals in isolation from Industrial and manufacturing policy. It is expected to address the
issues chemical sector is facing by promoting domestic industry and reduce the dependence High working capital requirements of the sector offset by
on import. Framework is expected to be finalised in 2019-20.
healthy liquidity profile
Steady and healthy margins of the industry could face Debtors Days creditor Days
The sector saw healthy average net cash
headwinds over the short term Inventory Days Cash Conversion Cycle
accruals ranging between 5-9% over the
past five years. The highest NCA was seen
PAT Margin EBITDA Margin ROCE 107
110 in pesticide segment, while the lowest was
101 99 98 in Polymers segment. On an average,
20% 14% 12.7% 91 88 48% of the total borrowings of the indus-
17.2% 84 81
15.0% 15.3% 12% 11.1% 10.8%
try were short term which has grown from
15% 13.3% 9.7%
9.1%
69 38% in FY14, over the 5 years. The current
12.5% 10%
56 56 57 58 57 ratio of the sector was moderate and re-
10%
8% 48
41
mained above 1 over the past 5 years.
38 40 35
6.3% 6%
The cash conversion cycle of the sector
3.8% 4.3% 4%
5% 3.2%
2.4% is at comfortable levels of 45 days, it is
2% FY 14 FY 15 FY 16 FY 17 FY 18 mainly driven by inventory holding which
0% 0% ranged between 78-86 days over the past
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 Source: Acuité Research, CMIE 5 years. We expect the liquidity profile to
remain stable over the medium term.
Source: Acuité Research, CMIE Source: Acuité Research, CMIE
110 111
Acuité Ratings & Research India Credit Risk Yearbook-2019

P OW E R ( R E N E WA B L E)
Sector outperformed the broader market
Index Return Market Return Index PE Index PB

29.34

19.57 19.43 20.87


18.17

2.16 2.94 2.54 2.97 2.7

2013-14 2014-15 2015-16 2016-17 2017-18


Mar-18
Apr-18

Oct-18
Aug-18
May-18
Jan-18
Oct-17
Aug-17

Nov-18
Sep-18
Jul-18
Jun-18
Feb-18

Dec-18
Nov-17
Sep-17
Jul-17

Dec-17

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Sector has performance that outperformed broader market in 2018, with month-on-month returns
exceeding market returns. Trailing P/E stood at healthy level of 18-20 times over 2-3 years. How-
ever, sector is trading at well above the book value.

Key Monitorables
¡¡ Crude oil is the major raw material for chemicals industry. Any change in crude prices will
impact the margins of companies in the industry. Prices of crude oil remains key monitorable
for the industry, given the high level of geo-political and economic uncertainty in the world.
¡¡ Plastic sector is witnessing high regulatory scrutiny due to environmental concerns over the
usage of plastics and threat of substitute. Going forward, how regulations span out and how
substitutes evolve cost efficiently will be key monitorable.

Risk category: Moderate to low


Power Generation (Renewable) has witnessed a favourable operating environment due to
improving asset utilization and firm government support to green energy. Nevertheless, there
are emerging concerns on the availability of land for large renewable projects, timely project
completion, lack of grid connectivity and risks of tariff negotiation by distribution companies in
the context of a sharp drop in new project tariffs.

112 113
Acuité Ratings & Research India Credit Risk Yearbook-2019

Industry background and characteristics Capacity additions to outpace demand over the next few
years. Solar would be at the forefront
Renewable power generation is the India’s fast growing source of power generation, with
installed capacity currently at about 71 GW out of total capacity of 346GW. Electricity gen- Sector had witnessed sharp revenue
erated by Renewable Energy Sources (RES) stood at 101.8 billion kWh in 2017-18, reporting 6000
Net sales (Rs Cr) 140% growth at a CAGR of 56% in last 4 years.
growth of ~25%. RES constitutes of Growth 51.0%
5,167 This growth was driven by solar segment
5000 120%
which has grown at CAGR of 85% due to
¡¡ Solar Power Generation 4000
46.4% 100% significant addition in installed capacity
¡¡ Wind Power Generation
3,422 80% of solar segment, capacity grown to 21.6
3000 GW in FY18 as against modest 2.6 GW
60%
¡¡ Biomass based Power Generation in FY15. Wind sector revenues grew by
2000 2337 27.3%
40% CAGR of 25% during the same period.
1837
In first half of the decade, India witnessed significant capacity addition in conventional electricity, 1000
1617 Wind energy capacities stood at 34.0
20%
however over the last 2-3 years capacity additions have been driven by RES. RES has grown at 13.6% GW in FY18 vis a vis 21.1 GW in FY15. Rev-
CAGR of 20.2% in last 5 years. 0 0% enue growth is expected to be at CAGR
FY14 FY15 FY16 FY17 FY18 of 10-12% in next 5 years, due to higher
base and reduced supply-demand gap.
Rating distribution: 78% of portfolio is investment grade Source: Acuité Research, CMIE

36.2%
Policy thrust to drive Solar while the wind sector strives to move
33.1% out of the feed in tariff (FiT) regime to an auction based price
discovery process
Upgraded: 10.3%
RES has been witnessing significant ca- RES Power generation continues to remains
pacity additions, with installed capacity at modest
MCR: 69 GW in FY18. However, power generat-
Downgraded: 6.3%
1.06 RES Generation (BU) Total Generation
13.4% ed from RES continues to remain modest,
1400
7.1% despite installed RES capacity contributing RES Share (%) 1,308 10%
1,242
5.5%
3.9% Default: 7.1%
to 20.1% of total installed capacity. Lower 1200
7.8% 8%
1,173
0.8% 0.0% level of RES contribution to overall power 1000
1,110
generation is attributed to cyclic and sea- 6.6% 6%
AAA/A1+ AA A BBB BB B C D 800
sonal nature of RES power generation. 5.6% 5.6%
600 4%
Source: Acuité Research, CMIE Top 4 states account for more than 50%
of the overall power generated from re- 400
Credit ratings of RES is healthy with 84% of portfolio in investment grade. MCR stood at newables. Tamil Nadu leads in the coun-
2%
200
1.26 which indicates industry is witnessing favorable outlook. 37% of upgrades resulted try in terms of RES power generation with 61.7 65.7 81.5 101.8
0 0%
in improving the ratings to A category (Adequate Safety), indicating healthy financial 16.2 Billion kWh in FY18 due to favorable FY15 FY16 FY17 FY18
risk profile of the industry. climatic condition.
Source: Acuité Research, CMIE
Solar segment has healthy financial risk profile with 89% of the companies in investment
grade, also has lowest proportion of companies in default at 2%. Smaller sub-segments
such as Biomass, Bagasse, Small hydroelectricity segments of RES are highly stressed
with 26% of the companies are in default, while only 42% of the companies are in in-
vestment grade.

114 115
Acuité Ratings & Research India Credit Risk Yearbook-2019

Developed states lead in RES power generation Tariffs seeing an improvement in recent auctions
3.4

Industry is currently running at overcapacity,


15.9% however due to low level of PLF supplies yet
to overtake demand in FY17 & FY18. Normal 2.7 2.7
37.2% 13.2% deficit stood at 0.7% and Peak deficit stood 2.6
2.5
at 2.0% in FY18. There are growing signs 2.4
that number of states will be power sur-
11.8%
plus in medium term, recently Power plants
10.4%
11.5%
in Tamil Nadu were in standby mode, since
demand fell by almost 20%. Peak demand SECI, T1-1GW SECI, T1-1GW SECI, T1-1GW SECI, T1-2GW NTPC 1.2GW SECI, T5-1.2GW
in the country stood at 164 GW in FY18 as (Feb-17) (OCT-17) (FEB-18) (APR-18) (AUG-18) (SEP-18)
Tamil Nadu Karnataka Maharashtra against installed capacity of 344 GW, if the
Gujarat Andhra Pradesh Other Power plants function at optimal utilisation, Source: Acuité Research, CMIE
current installed capacity is enough to meet
Source: Acuité Research, CMIE the demand in next 3-5 years. Lower than However, the sector is marred with Growing share of solar energy capacities in RES
ambiguity on anti-dumping and safe
expected growth and lack of long term power purchase agreements with discoms are hurting guarding duties on solar compo-
the power producers. nents, lack of clarity on GST, BIS stan- 21.7
12.3
dards, Discoms fixing upper ceiling
RES has been witnessing significant capacity additions, overtook Conventional sources in terms 8.7
of tarriffs and poor grid connectivi- 3.2
of yearly new capacity additions in FY17. RES share in total installed capacity is increasing with 4.9
ty have resulted in subdued interest 2.6 4.6
installed capacity crossing 20% of Total Installed Capacity. In RES, Solar electricity segment
from producers. 4.0
has grown drastically thanks to generous subsidy and government push for clean energy. 25.1 32.3
34.0

We expect power generation to grow 21.1


Demand in the wind sector is driven by Growing share of renewable energy in total at CAGR of 6-6.5% in next 5 years on 3.8 25.1 4.4 4.4 4.5
govt. tenders at the state and central lev- installed capacity account of significant expected ad- 2014-15 2015-16 2016-17 2017-18
el to meet renewable output target of the ditions from RES, also thermal power
Renewable Energy Conventional Energy Small-Hydro Electricity Biomass Wind Energy
states. This was to move away from the FiT plants have shown signs of recovery
Solar Energy
regime. Auctions in 2018, however, saw a with PLF improved to 61.14% in 2018-
lukewarm response with many auctions fail- 19 ( Up-to Oct). Source: Acuité Research, CMIE
ing to attract enough bidders. Wind tariffs
had dropped drastically in FY18 across the Govt policies have provided a lot of impetus to the sector
3 auctions conducted by SECI, tariff has 87.7% 87.9% 88.2% 87.0% 82.5% 79.9%
declined from Rs. 3.46/ unit in Feb 2017 to Accelerated depreciation benefits for the sector (40%) allow the companies to have high return
Rs.2.44/unit in Feb 2018. on each project and shield from impact of the uncertain future downward cycles in the business.
This also provides more impetus for capacity additions.
Tariffs on RES is witnessing steady im- 17.5% 20.1%
12.3% 12.1% 11.8% 13.0% National wind-solar hybrid policy aims to boost renewable power as well as hybridisation of ex-
provement after hitting historic lows in
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 isting ones. The objective of policy is to provide large scale grid connection of wind-solar photo
FY18, Thanks to competitive bidding, fourth
voltaic (PV) systems for efficient utilisation of transmission lines and lands.
tranche of the auction tariffs rebound to Source: Acuité Research, CMIE
Rs. 2.51/unit. Recent auction conducted by It provides flexibility in terms of wind and solar component with 25% of power from one source
to recognise it as hybrid plant. Policy provides Integration of energy sources at both AC and DC
NTPC and SECI (5th Trench) had witnessed tariff growth to Rs. 2.77/unit and Rs. 2.76/ Unit levels.
respectively, thanks to reduced aggressive bidding and increase ceiling rate. After subdued
2018, 1GW Maharashtra’s solar tender was oversubscribed by 900MW. Recovering tariff rate Government of India has set target of RES capacity of 175 GW by 2022, includes 100GW of
and interest from developers, RES is poised for healthy growth. solar, 60 GW of Wind, 10 GW of Biomass and 5 GW from small hydropower. Government is
pushing for clean energy to meet Paris agreement targets to reduce carbon footprints. If targets
are achieved RES share of installed capacity would increase to 35-40% in FY2022.

116 117
Acuité Ratings & Research India Credit Risk Yearbook-2019

Margin improvement driven by improved asset utilisation Rise in WC cycles on the back of increasing debtors a
cause of concern
Debtors Days Creditors Day
EBITDA Margin PAT Margin 7.0% RoCE
8.2% 10% Inventory Days Cash Conversion Cycle The cash conversion cycle of the sector
94%
6.5% has been increasing since FY15 at levels
90.6% 5.5% 108
92% 91.5% 89.2% 5% 5.1% ranging between 48 to 108 days in the
83
108 past 5 year period. The cash convers-
86% 4.1%
-4.1% -5% 3.7%
71
tion cycle was driven mainly by debt-
85.7% or collection period which ranged be-
84% 53
-10.4% -10% 60 46 65 tween 46 to 108 days, due to delays in
54
82% 48 collection from the government agen-
83.1%
80%
-14.6% -15% 19 cies. We expect the cash conversion
11
5 cycle and overall liquidity in the seg-
110 1
78% -20% ment to improve slightly going ahead
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
FY14 FY15 FY16 FY17 FY18 as funds are released.
Source: Acuité Research, CMIE
Source: Acuité Research, CMIE
PAT margins were negative majorly due to accelerated rate of depreciation and higher
financial expenses. Companies were allowed to claim maximum up to 80% of depreciation
in year one of commissioning to incentivise green energy investment, which is subsequently Key Monitorables
reduced to 40% in budget 2016-17. RoCE is improving on account of improved capacity util-
isation, resulting in higher power generation with marginal incremental cost of production. ¡¡ Availability of fresh long term power purchase agreements and amendments in exist-
Going forward profitability is expected to remain steady and RoCE is expected to improve ing PPA tarrifs
capacity utilisation further.
¡¡ Ministry of power has mandated discoms to purchase 21% of power purchased from
Gearing levels seeing an improvement due to higher renewable sources, compared to Target of 17% in FY19. However, enforceability re-
mains the key issue. Going forward how discoms complies to the targets will be key
equity infusion monitorables
¡¡ Government has set target of 175 GW of Renewable Energy Sources (RES) by 2022,
Gearing ICR NCA/Total debt
3.8 Installed capacity of RES stood at 72 GW as June, 2018. At the current pace, RES ex-
0.07 0.07 pected to grow to 30-35% of Installed capacity by 2022. How does growth in RES mix
0.06 impacts supply and demand will be key monitorable.
2.0 2.0 ¡¡ Release of funds from Govt agencies are needed to improve the liquidity profile of
2.3 1.4 1.4
the sector.
1.8 1.6
1.6 0.04
1.2

0.02

FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE


Gearing levels in the sector has improved after peaking in FY16. Significant levels of capacity
additions had taken place in FY17 & FY18, much of these additions are made using relatively
lower debt levels with players such as Tata Power Renewable Energy Ltd have funded the ca-
pacity addition with high levels of equity. Gearing is expected to remain in control over the
medium term.
Debt protection metrics are improving on account lower debt funded Capex in FY17 & FY18
and improved utilisation levels had resulted in improved coverage metrics. Asset turnover ratio
has improved to 0.15 times in FY18 as against 0.13 times in FY17 and reduced financial expense
resulted in improved debt-protection metrics.
118 119
Acuité Ratings & Research India Credit Risk Yearbook-2019

CEMENT Industry background and characteristics


India is the second largest cement market in the world, both in production and consumption.
It is one of the most organised sectors of the country, with top 20 companies contributing
towards 70 percent of the total production, some of the major producers include J K Cement
Ltd, Ultratech Cement Ltd, ACC Cement Ltd, Ambuja Cement Ltd and Shree Cement Ltd. India
has witnessed tremendous growth in the cement industry in last decade to meet its fast grow-
ing demand from both infrastructure and housing segments.

Top 5 states contribute ~ 53% of the total production in India

10.48

Tamil Nadu Gujarat


31.1 16.19
Rajasthan Maharashtra

Andhra Pradesh Others


15.51
7.3
Madhya Pradesh
8.39
11.03

% Contribution to total production of 287,964’000 tonsFY18

Source: Acuité Research, CMIE

Rating distribution: 82.5% of portfolio is investment grade

40.4%
Upgraded: 7.0%

22.8%
MCR:
Downgraded: 7.0%
1.00
14.0%

Risk category: Low


8.8%
5.3% 5.3%
3.5%
Default: 8.8%

The healthy credit quality in the sector is driven by a strong financial profile of the large ce- AAA AA A BBB BB B D
ment companies well supported by an improving demand scenario. While the sector does wit-
ness challenges such as high capital cost, long project gestation period and risks of regional Source: Acuité Research, CMIE
oversupply, a consolidation in the industry and economies of scale have helped to offset some
of these challenges. Credit ratings of cement producers are highly skewed with about 83% of portfolio in In-
vestment grade, while about 9 % of portfolio is in default. Highest safety grade comprises of
some of the top players in the industry such as ACC Ltd., Ambuja Cement Ltd., J K Lakshmi
Cement Ltd. Shree Cement Ltd. and Ultratech Cement Ltd. The MCR ratio stood at 1, indicative
of moderate financial stability in the sector.

120 121
Acuité Ratings & Research India Credit Risk Yearbook-2019

Industry is expected to witness robust growth over the Government initiatives will continue to bear fruit and provide
medium term driven by housing and infrastructure spending continuous demand over the medium term

Demand for cement has grown at CAGR of Sales (Rs. in ‘000 Crore) The supply of limestone is government controlled under the Mines and Minerals (Development
3.7% Y-o-Y during FY13-18, in tandem with the Growth in Production Volume % and Regulations) Act, 1957, (MMDR Act) and is subject to periodic license fee review and
supply. Further, the industry exported ~1% of its Growth in Consumption Volume % renewal.
150 138 8.0%
production. 125 129 Government spending towards the infrastructure development of the country plays a major
123 6.3%
We expect the industry to outpace the 5% CAGR 108 110
5.9%
6.59%
6.0% role in the development of this sector. Execution of projects such as Bharatmala Project
growth of last 5 years over the medium term on 100
4.6% that seeks to develop 84,000 kilometers of road by 2022 and the Housing for All by 2022
4.95% 4.0%
account of significant government spending on 3.7% 3.6% (affordable housing) will benefit the sector’s growth.
2.1% 4.43%
affordable housing, increase in private housing 2.0%
and growth in urban infrastructure, roads and 50 1.9%
-0.81% Profitability expected to see an improvement backed
irrigation spends.
-1.2%
0.0%
by higher demand
The Union Budget 2018-19 doubled the alloca- 0 -2.0%
tion for affordable housing to Rs.8.98 billion. FY13 FY14 FY15 FY16 FY17 FY18 EBDITA % PAT % RoCE
Further, the Government of India has decided 15%
20% 8% 14.5%
to adopt cement instead of bitumen for the Source: Acuité Research, CMIE 18.5%
17.7% 14%
7.5% 16.3% 17.3% 7%
15.2% 15.5% 6.2% 13%
15%
construction of all new road projects as cement is more durable and cheaper to maintain than 6%
12%
12.0%
11.5%
bitumen in the long run, which would add to the demand of cement. 5.5% 5.8% 5%
5.1% 11% 10.3%
4.8% 10.9%
10% 4% 10%
Domestic consumption saw a CAGR of 3.7% Y-o-Y during FY13-18, in tandem with the supply. Fur- 10.2%
3% 9%
ther, the industry exported ~1% of its production. The industry bounced back from the decline in
8%
production and utilisation levels in H2FY17 due to demonetisation to register healthy growth in FY 18. 5% 2%
FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18
The supply of limestone is government controlled under the Mines and Minerals (Development and
Regulations) Act, 1957, (MMDR Act) and is subject to periodic license fee review and renewal. Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Due to the nature of its business, the cement manufacturing industry is subject to operating risks The industry has seen a consistent growth in EBITDA margins FY14-18, PAT margin dip in FY17
and requires investments towards requisite safety requirements and standards. It is also subject could be related to the impact of GST and demonetisation on the industry, besides which, the
to various central and state environmental laws and regulations relating to pollution control. The industry has seen a consistent growth in PAT margins as well. ROCE in the industry has been
industry is subject to constant changes in technology, thereby requiring constant upgradation and volatile, attributed to the consistent increase in debt in the sector. Long term debt has grown
substantial capital expenditure. 1.7 times in the past five years. Further, underutilisation of capacity has kept strain on the prof-
itability in the industry. The first half of FY19 saw lower profitability in the segment; however, is
expected to recover at a slower pace. Acuité expects the profitability to remain range bound
Pace of Capacity additions are expected to increase in the near to in the short term.
medium term
Pace of capacity additions set to increase over
Debt protection metrics remain healthy and steady despite
the short term increasing debt levels as companies infuse equity.
Total capacity addition in the cement in-
Debt protection metrics remained healthy in
Total Capacity (Million Tonnes) dustry for FY13-18 (sample size) was ~ 104
line with profitability
% Growth in Capital Addition million tonnes. Further, additional growth
150
440 461 476 8% of ~ 70 million tonnes is expected in the 0.55 0.54 0.55 Gearing in this sector has remained range
388 410 7.3% near to medium term. Of the total ca- 0.51 bound and at safe levels over the past five
372 6% 0.47
100 5.3% 5.7% pacity, 98% lies with the private sector, 0.44 years. Total Debt and net worth in the indus-
4.3% 4%
and the rest with the public sector. Ca- try have grown in tandem at ~40% FY13-18.
50
pacity utilisation for the cement industry Major influx of capital was seen in compa-
3.2%
2% is estimated at 71-72%, exposing it to risks nies such as JSW Cement Ltd, Sagar Ce-
related to capacity under utilisation and ments Ltd, Saurashtra Cements Ltd.
0 0%
high fixed costs.
FY13 FY14 FY15 FY16 FY17 FY18
FY13 FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE Source: Acuité Research, CMIE


122 123
Acuité Ratings & Research India Credit Risk Yearbook-2019

The debt protection indicators have been Debt protection metrics remained healthy in line
with profitability
Key Monitorables
adequate and stable in this sector during
ICR NCA/TD
FY14-18 as rising direct and indirect costs ¡¡ Seasonal and cyclical demand
constantly puts pressure on the margins 7.00 0.41 0.45 ¡¡ Higher installed capacity vis-à-vis demand, leading to under utilisation
in this sector. Need for constant upgrada- 0.36
0.33 0.35
tion of technology in the sector increas- 6.00 6.22 0.31 0.32 ¡¡ Regional oligopolistic market
es the debt requirement, thereby, putting 4.90 0.30 0.25
5.00
4.36 ¡¡ Dependence on limestone as the key raw material
pressure on the protection metrics. Acuité
4.51 4.56
expects the debt protection metrics to re- 4.00 4.31 0.15 ¡¡ Energy intensive industry
main at the same level inspite of the ex- 3.00 0.05 ¡¡ Exposure to environmental laws and regulations, susceptible to sudden changes in govern-
pected capacity additions in the sector. FY13 FY14 FY15 FY16 FY17 FY18
ment policies
Source: Acuité Research, CMIE

Working capital and liquidity levels healthy


The industry has a healthy liquidity profile. Debtors Days Creditors Day
Marked by healthy net cash accruals be- Inventory Days Cash Conversion Cycle
tween 10-13% over the past five years. On
an average 21% of the total borrowing of 86 85
81 80 79
the industry were short term. The cash con-
version cycle of the sector at comfortable 58 58
54 56
levels at an average of 45 days, it is mainly 61
driven by inventory holding which ranged 48 47 47
45
between 78-86 days over the past 5 years . 40

The current ratios in the sector was moder- 17


20 21 23 23
ate and remained above 1 over the past 5
years. We expect the WC and liquidity pro- FY 14 FY 15 FY 16 FY 17 FY 18
file to remain stable over the medium term.
Source: Acuité Research, CMIE

Sector under-performed broader market in Sector valuation has increased marginally


the last 12 months over the last 5 years

Index Return BSC 600 Return Index PE times Index PB times

120 4.0
100 105.3 102.9
2.8 3.4 3.3
80 2.6 2.8 3.0
2.9 60.7
60 50.5
2.0
40 33.1
17.3
20 1.0
0 0
-18

18
18
18

18
18

Se 8
8
-18
M 8
18

-18

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18


1
l-1
1

c-
v-
b-

p-
n-

g-
r-
n

ar

ay

ct
Ju
Ap

De
No
Ja

Ju
Fe

Au

O
M

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Sensex has outperformed cement industry index. The PE index is fluctuating and running at a
higher PE in FY16-17, and trading well above book value. Sector is expected to be stable in the
market in short to medium term.

124 125
Acuité Ratings & Research India Credit Risk Yearbook-2019

AU TO A N C I L L A R I E S Industry background and characteristics


Auto ancillaries sector (Excluding Batteries) accounts for 2.8% of GDP in FY2018 and totally
employed over 3 million people. Sector forms backbone to Indian automobile manufacturing.
Auto-components sector stood at US $ 51.2 Billion in FY2018 and contributes to 4% of India’s
exports. Driven by healthy growth of vehicles sales Auto-ancillaries sector has witnessed dras-
tic growth over last decade. Auto ancillaries sector majorly composed of following sub-seg-
ments

¡¡ Auto-components and castings

¡¡ Tyres & Tubes

¡¡ Storage Batteries

Rating distribution: 72.4% of portfolio is investment grade


26.4%
23.3%

19.9% Upgraded: 13%


18.6%

MCR:
Downgraded: 4% 1.12

6.2%

2.8% 2.5% Default: 2.5%


0.3%

AAA/A1+ AA A BBB BB B C D

Source: Acuité Research, CMIE

Revenue growth steady and driven by the OEM demand


Risk category: Low Steady revenue growth Auto ancillaries sector witnessed healthy growth of
Net Sales ('000, Rs. Cr) Growth (%) CAGR of 7.4% over last 4 years driven by auto com-
The low stress in the sector is on account of healthy financial risk profile on the back of healthy ponents segment which has witnessed growth of
and stable demand drivers in the domestic and export segments. Acuité expects the industry 126.3 10.5% driven by increased demands from OEM’s and
119.0
to maintain its healthy financial risk profile on account of steady demand from automobile 113.3 115.4 aftermarket sales. Storage batteries posted growth
OEMs, expected healthy pricing discipline and also growing replacement market demand. 94.9
19.3%
of 8.1% CAGR during this period backed by steady
demand from replacement segment and demand
from automobile OEM’s demand.
However, tyres segment witnessed muted growth of
1.9%
CAGR of 3% during this period due to rapid growth
6.1%
3.1% in imports from China. Sector is expected to witness
healthy growth in demand as automobile sales ex-
FY14 FY15 FY16 FY17 FY18 pected to pick-up after muted 2018 and stable de-
Source: Acuité Research, CMIE mand from replacement market.

126 127
Acuité Ratings & Research India Credit Risk Yearbook-2019

Robust demand across ancilliary segments OEMs especially in the passenger vehicle segment account for a
major chunk of the volumes
Tyres segment witnessed healthy growth Growing Tyre and Batteries demand OEM's Exports After Market PV 2 & 3wheelers CV
in production witnessing healthy growth
of CAGR of 8.8% over last 4 years to 180.3 FY18 FY14
180million units, primarily driven primar- 17% 18%

ily driven by significant sale of scooters, 129.6


128.9 29% 26% 31%
scooters production grew at CAGR of
43%
18% during this period. Also replacement
market has been playing significant role 78.5
in sales of tyres. It is estimated in FY18, 54% 56%
49% of Two & Three tyres sold in replace- 26%
ment market as against 42% FY14. Radi-
als levels has reached 98% in Passenger FY14 FY18
vehicles segment, 40% and 36% in LCV Source: ACMA Source: Acuité Research, CMIE
Tyres ('Million nos) Batteries ('Million nos)
and HCV respectively in FY18. Demand
for Tyres are highly immune to economic Source: Acuité Research, CMIE
Product-wise Sales However, Passenger vehicle segment has
cycles, Going forward replacement mar- been going through lot headwinds as the
Engine Suspension & Braking Transmission&Steering
sales witnessed negative growth in Q1FY18 &
ket is expected to drive the sale of tyres as number vehicle on the road increasing. Body Electrical&Electronics Interiors Misc Q2FY18. Increase in fuel price, NBFC’s liquidi-
ty crunch, Kerala floods, poor festive season
Battery segment has witnessed growth of CAGR of 13% over last 4 years to 129 million units
5% sale and One-time insurance payment had
driven by healthy demand from OEM’s, replacement market and reduced import levels sup- 12% put customers off from purchasing cars. Also
26%
porting domestic players. India has developed its own Lithium ion cells technology, as the demand for two-wheelers fell in Dec, 2018 by
India to soon get Lithiumion-gigafactory for electric cars. 10% 3% YoY mainly due to raise in insurance cost,
Die casting segment has witnessed has witnessed healthy growth driven by healthy demand rural distress and liquidity crunch.
14%
from OEM’s and estimated to be size of USD 4 billion in FY18. Demand for die casting pri- 17% Industry is witnessing healthy capacity addi-
marily depends on OEM’s demand and less of replacement market. 13% tion to meet growing demand from OEM’s and
aftermarket segment. India is planning to build
Other Auto ancillary’s turnover has grown over 13% CAGR over last 4 years, with turnover its first lithium-ion gigafactory for electric ve-
stood at Rs. 34564 Cr in FY18, driven high level of demand from OEM’s due to healthy vehi- Source: ACMA hicles which would reduce India’s dependence
cle sales and stable growth in aftermarket segment. During this period Two-three wheelers,
Passenger vehicles and commercial vehicles sales had grown at CAGR of 7.9%, 6.6% and on imports from China, Japan and South Korea. Capacity additions expected to remain healthy
7.6% respectively. in medium term due to expected healthy demand from OEM’s.
In sub-segments Starter motors, Gears and Axle shaft had grown over 15% due to OEM
New Projects Announced ('000, Rs.Cr) Projects Completed ('000, Rs.Cr) Under Implementation ('000, Rs.Cr)
demand and increasing aftermarket services. Demand for auto ancillary expected to grow
at healthy pace given that two-wheeler penetration estimated at 17% and Cars penetration
20.5 20.6
stood at just 2.2% sector offers immense growth opportunity. 19.8

16.3
13.9 14.2
12.4
11.5

6.7
6.0 6.0
4.7 4.6 4.8
3.0

FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE

128 129
Acuité Ratings & Research India Credit Risk Yearbook-2019

Steel ('00 Rs. /ton) Aluminium ('00 Rs. /ton) Iron and steel is the major raw materi- Profitability of the industry remains healthy in spite of drop in margins over last 2 years. Tyres
Rubber ('00 Rs./quintal) al for manufacturing auto-ancillaries and segment witnessed lower price realization due to surge in Chinese import, resulting decline in
therefore major factor for determining the selling price. Battery segment and other ancillaries segment had witnessed stability in profit-
cost competitiveness. Majority of steel con- ability at 14-15% and 13-14% of EBITDA margins respectively. Going forward sector is expected
168 177 174 167 166 171 160 157 sumed is domestically produced; hence, to witness stability in profitability as the tyres imports from china has been in declining trends
150 158 161 156 162
domestic price drives the margins of the over last 3 years, which would help bringing back pricing discipline in tyres segment.
manufacturers. Domestic steel prices have
131 127 124 124 120 124 126 129 133 130 128 122 122
increased by over 20% over the last year.
Aluminum is next most used metal in au-
Healthy debt-protection metrics and declining gearing
60 60 58
49 52 54 57 58 58 58 58 58 60 tomobile manufacturing had declined over
10% in last 7 months due to dumping of alu-
Jan-18

Aug-18

Sep-18
Apr-18

Jun-18

Oct-18

Dec-18
Jul-18
Feb-18

Mar-18

May-18

Nov-18
Dec-17

D/E ICR NCA/Total Debt


minum into Indian Market due to ongoing
trade war between US and China. Rubber
0.66
the major input cost for tyres manufactur- 7 6.45 6.43 0.80
Source: Acuité Research, CMIE 6.01
ing declined over 9% in 2018. 0.49
6 5.30
0.43 0.43 5 0.68 0.60
0.39 3.82 0.59
Regulatory/ policy 4
0.50 0.47 0.40
0.39
3
Currently Automobiles attracts peak GST of 28%, along with additional Cess ranging from 1% to 2 0.20
15% depending upon length, type and engine size. However, automobile manufacturers are urging 1
government to reduce GST to 18% to revive the automobile sales as sales declined in Q2&Q3 of 0 0.00
FY19. FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18

Bharat Stage VI to be rolled out from April 1, 2020 as Supreme Court refused to provide grace Source: Acuité Research, CMIE Source: Acuité Research, CMIE
period, will impact the automobile manufactures as well as customers. Compliance with BS-VI will
require higher investment in technology to upgrade vehicles in stock and making new vehicles , as Gearing level is under control, D/E ratio dropped below 0.4 times in FY18, debt protection
Sulphur content to be drastically reduced to 10 PPM from 50 PPM in BS-IV, as India skipped BS V. metrics are very strong, in-line with healthy credit profile of the sector. Debt-protection metrics
Introduction on BS-VI expected to deteriorate margins of automaker by 100-150 bps. expected remain healthy in medium term, as the profitability levels improve and gearing remain
range bound.
Government has proposed to come out with policy to vehicle that are more than 15 years to curb
vehicular pollution. India has more than 38 million vehicle on road ageing more than 15 years. This Healthy liquidity and working capital profile
would drastically increase demand for new vehicle.
The industry has healthy liquidity profile. Marked by healthy net cash accruals , about 7-10%
Healthy profitability and return levels on revenue over the past five years. On an average 40% of the total borrowing of the in-
dustry were short term. The cash conversion cycle of the sector has remained at healthy
levels ranging between 37 days to 52 days in the past 5 year period.
PAT Margin EBITDA Margin RoCE
The working capital cycle was driven mainly Debtors Days Inventory Days
23.0% 23.3%
16.0% by moderate inventory holding levels with Creditors Days Cash Conversion Cycle
14.7% 14.8% 14.2% 18.6% an average of 54 days, the sector further 58 58
12.6% 16.3% 57
14.7% enjoys average of ~54 days credit from its
55
suppliers. The current ratios in the sector 57 57
7.1% 52
6.3% 6.7%
5.7% was moderate and ranged between 1.2 to 49 51
53
4.5% 52
1.35 over the past 5 years. We expect the 47
49
sector to maintain stable working capital 49
42
cycle and a healthy liquidity position in the 41 45
43
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 near to medium term. 37
39

Source: Acuité Research, CMIE Source: Acuité Research, CMIE


FY14 FY15 FY16 FY17 FY18

Source: Acuité Research, CMIE

130 131
Acuité Ratings & Research India Credit Risk Yearbook-2019

Healthy liquidity and working capital profile

Index Return Market Return Index PE Index PB

6.0 6.0
52.1
5.3
5.0 5.0
40.2 4.6 4.7
37.8
4.0 4.0 4.0

3.0 24.3 3.0 26.5 3.0

2.0 2.0

1.0 1.0

0.0 0.0
7 8 8 8
l -17 p-17 v-1 an-1
8
r-1 ay-1 n-18 l-18 p-1
8
v-1 FY14 FY15 FY16 FY17 FY18
Ju Se No J Ma M Ju Ju Se No

Source: Acuité Research, CMIE Source: Acuité Research, CMIE

Sector has underperformed the broader market in 2018 due to fears of slowdown in automo-
bile sales. Also valuation remains on higher side with P/E ratio stood at 52 times and index is
trading well above book value, P/B stood at 4.7 times

Key Monitorables
¡¡ Sales of automobiles has declined in FY19 due to Increase in fuel price, NBFC’s liquidity crunch, Company Profile
Kerala floods, poor festive season sale and One-time insurance payment. It remains key mon-
itor able how sales levels to span out in 2019 Acuité is a Credit Rating and Research company.

¡¡ Due to implementation of BS-VI due in April 2020 which would increase cost of production,
how the OEM’s able to pass on the cost and maintain sales volume remains to be noticed
Incorporated as part of an initiative by the Ministry of Finance and Reserve Bank of
given the sales decline India (RBI) to facilitate credit growth
¡¡ Electric vehicle (EV) is high growth segments in OECD. However, in India EV remains in nascent
stage. This segment offers immense potential for growth. However there are structural issues,
Registered with the Securities and Exchange Board of India (SEBI) as a cred-
due to lack of infrastructure and technology remains.
it rating agency and accredited by RBI as an External Credit  Assessment
Institution (ECAI)

Assigned credit ratings to various securities, debt instruments and bank facilities of
more than 7000 entities (as on December 31, 2018) spread acros industries in India

Received technical assistance grant by  the Department for International


Development (DFID), UK under a World Bank project

Found eloquent mention in IFC’s report as a novel and sustainable initiative by the
Government of India

132 133
Acuité Ratings & Research India Credit Risk Yearbook-2019

Vision, Mission & Values Differentiators

Vision

Help financial markets grow and be more efficient. RatingsBuzz: a mobile app that provides easy access to all our ratings

Mission
QR Code in all Rating Communications: making our rating reports and
Empower market participants and build trust through timely information, rationaleseasily verifiable – An industry first
incisive analysis and unbiased opinion.

Values
Online Platform: to collect bankers’ and investors’ feedback on Acuité
rated entities, thereby ensuring immaculate stakeholder experience
Our values collectively emphasize the TIEs and relationships
we establish – our most valuable assets

Trust Innovation Excellence


Knowledge Centre: an online repertoire of our research reports spanning
Uncompromising orientation Foster a culture of idea Excellence in our systems, across industries and the Indian economy, empowers our stakeholders to
towards transparency, hones- generation and use of new processes and execution to make informed decisions
ty and integrity in our actions technology to help us pro- help issuers and investors get
so that our opinions are truly actively bring improvement world class experience with
independent and unbiased. and change in the industry. our services.

134 135
Research Team

Suman Chowdhury
President
suman.chowdhury@acuite.in

Karan Mehrishi Naveen Hegde


Lead Economist Senior Manager (Research)
karan.mehrishi@acuite.in naveen.hegde@acuite.in

Salome Farren Rishabh Mundada


Analyst Analyst
salome.farren@acuiterating.in rishabh.mundada@acuiterating.in

DISCLAIMER: This report is based on the data and information (data) obtained by Acuité from sources it considers reliable.
Although reasonable care has been taken to verify the data, Acuité makes no representation or warranty, expressed or implied
with respect to the accuracy, adequacy or completeness of any Data relied upon. Acuité is not responsible for any errors or
omissions or for the results obtained from the use of the report and especially states that it has no financial liability, whatsoever,
for any direct, indirect or consequential loss of any kind arising from the use of its reports. Any statement contained in this report
should not be treated as a recommendation or endorsement or opinion or a substitute for reader’s independent assessment.
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