Amidst Preparation for IPO at Premium Price, Sarbottam Cement Gets Fairly Positive Rating from ICRA Nepal

ICRA Nepal has assigned an issuer rating of [ICRANP-IR] BBB+ (pronounced ICRA NP issuer rating triple B plus) to Sarbottam Cement Limited. Sarbottam Cement Limited had called its AGM on the last month of last year to discuss the issuance of IPO via the book building method. Companies who qualify for the book building method can issue an IPO at a premium price.

The rating received by Sarbottam Cement is better than that given to NIFRA. NIFRA has been trading in NEPSE for 5 days now after the IPO shares were listed. NIFRA opened at the upper limit and has been hitting the intraday 10% positive circuit ever since. While writing, NIFRA has an LTP of Rs. 546. 

About the Rating Agency

ICRA Nepal Limited, the first credit rating agency of Nepal, is a subsidiary of ICRA Limited (ICRA) of India. It was licensed by the Securities Board of Nepal (SEBON) on October 3, 2012. ICRA Nepal is supported by ICRA Limited through a technical support services agreement, which envisages ICRA helping ICRA Nepal in areas such as rating process and methodologies, analytical software, research, training, and technical and analytical skill augmentation.

Its parent company, ICRA Limited, was set up in 1991 by leading financial/investment institutions, commercial banks, and financial services companies as independent and professional investment information and credit rating agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies.

About the Company

Incorporated in October 2010 as a private limited company, Sarbottam Cement Limited was converted into a public limited company in August 2019. It is involved in producing and selling clinker and cement. Initially established as a plant with a capacity of ~0.4 million MTPA, the capacity currently stands at ~1 million MTPA for clinker as well as grinding.

The shares of the company are held by 17 individuals, of which the major shareholding is from the Saurabh Group (~62% stake), a prominent business house in Nepal. Its factory is located at Ramnagar VDC-05, Nawalparasi district. The company mainly manufactures ordinary Portland Cement (OPC) and Portland pozzolana cement (PPC) under the brand Sarbottam.

The Rating Given to the Company

The rating action factors in the company’s improved financial profile with reduced gearing levels (0.59 times as of mid-January 2021 against 1.65 times as of mid-July 2019) and strong operating margins (~24% for H1 FY2021) despite a gradual decline amid the increasing competition. ICRA Nepal also considers the company’s strong operational profile with healthy volumetric sales growth in FY2020, despite the impact of the Covid-19 pandemic.

The ratings also derive comfort from the company’s experienced promoter profile with ~62% stake held by individuals from the Saurabh Group, which has an established presence in manufacturing and selling of construction materials, among others. According to the rating agency, the company’s debt service indicators remain comfortable.

The rating agency has also stated that Sarbottam’s financial flexibility also remains healthy with low reliance on working capital borrowings. The company’s improving brand recall, extensive dealer network, and the recent funding support by promoters with further similar commitments also remain rating positives.

The Company's Challenges and How the Upcoming IPO Might Solve Them

Nonetheless, the ratings are constrained by the likely pressure on Sarbottam’s near-term debt service indicators amid the shortened loan repayment tenure. The company plans to significantly lower the debt burden from the proposed initial public offer (IPO) proceeds (including sizeable share premium expected to be raised through the book building IPO method).

Hence, any unexpected timeline delays would remain critical as the operational cash flows might remain under pressure to serve the increased debt burden. Additionally, the evolving economic impact of the pandemic and the recent political turmoil have created challenges in the operating environment. The ratings are further impacted by the intense competition in the industry with many established players/brands as well as large upcoming players in the field. Sarbottam’s margins are also exposed to the cyclicality inherent in the cement industry and the volatility in interest rates, as seen in recent years.

Rating Agency's Conclusion:

Going forward, ICRA Nepal states that the company’s ability to successfully complete its IPO issue as planned, judiciously manage its working capital levels as well as maintain healthy sales growth and comfortable debt coverage indicators would be the key rating sensitivities.