By Amey Joshi

India Ratings and Research (Ind-Ra) has rated UltraTech Cement Limited’s (UCL) instruments as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Commercial paper (CP) programme*

-

 

Upto 12 months

INR25,000

IND A1+

Assigned

Short-term loans

-

-

-

INR15,000

IND A1+

Assigned

* Proceeds will be used for working capital requirements/refinancing of debt/bridge finance/capital expenditure.

KEY RATING DRIVERS

Leading Market Position: UCL is India’s largest cement company in terms of capacity (70.6mmtpa of grey cement) and market share (around 17% in FY17). The company is geographically diversified with a strong presence in the northern, western and southern regions of the country. The leadership position enables the company to charge a premium for its products over the prevailing prices in all its markets.

Cost Efficiencies: UCL’s coal consumption was 708kcal/kg at end-FY17 (FY16: 714kcal/kg) and electricity consumption was 79kWh (82kWh), among the lowest in the industry. The company meets 80% of its power requirement through captive power plants, while 7% is met through waste heat recovery systems. Pet coke usage was around 74% of the total requirements at end-FY17. UCL’s freight costs (per ton of the cement sold) are also among the lowest in the industry and are aided by the geographical diversification of its plants, which reduces the lead distance to its markets. 

Asset Acquisition and Additional Synergies: UCL had entered into an agreement with Jaiprakash Associates Ltd (JAL) in 2014 to acquire its cement assets (capacity of 21.2mtpa including 4.1mtpa grinding capacity under construction) for a consideration of INR162 billion, which is largely transfer of debt. UCL completed this acquisition during June 2017. This would provide additional diversification to UCL with increased presence in central India, coastal Andhra Pradesh, Uttarakhand and Himachal Pradesh, where UCL does not have a meaningful presence. It would also increase UCL’s market share to close to 21% in India. Ind-Ra believes that the EBITDA margins of acquired assets would be lower than UCL’s. Consequently, the combined EBITDA margins of UCL are likely to decrease in the near term.

Ind-Ra believes that improving the EBITDA margins of the acquired assets would be the key challenge for UCL. Ind-Ra expects the company to meet this challenge by improving operating efficiencies and capacity utilisation, and through co-branding of the products of the acquired assets.

Credit Metrics to Recover; Strong Liquidity Position: Ind-Ra expects UCL’s net financial leverage (net debt/EBITDA) to increase in FY18 (FY17: 0.2x; FY16: 1.2x) with the addition of debt due to the JAL acquisition, and improve from FY19 with the integration of JAL within UCL. The company has recorded positive cash flow from operations and free cash flows for more than a decade.

Cement Demand Likely to Improve in FY18: Ind-Ra expects the cement industry to grow 4%-6% during FY18. There will not be any significant incremental capacity additions in the market and this is expected to increase capacity utilisation rates in the coming years. A favourable monsoon, which can increase rural demand, and government’s initiatives (such as Housing for All and thrust on infrastructure activities) are expected to improve cement demand post FY18.


RATING SENSITIVITIES

Negative: A delay in achieving the expected profit margin levels on the integration of the acquired assets and/or any further debt-led acquisition resulting in the net debt/EBITDA above 1.5x by FY19 could lead to a negative rating action.


COMPANY PROFILE

UCL is the largest manufacturer of grey cement, ready mix concrete and white cement in India. It has 12 integrated plants, one clinker plant, 20 grinding units, seven bulk terminals and two white cement and putty plants. Its operations span across India, the UAE, Bahrain, Bangladesh and Sri Lanka. In 1QFY18, UCL reported revenue of INR69 billion and EBITDA of INR17 billion.


FINANCIAL SUMMARY

 

Particulars

FY17

FY16

Revenue (INR million)

253,749

251,532

Operating EBITDA (INR million)

52,124

49,010

Gross Interest Expenses (INR million)

6,401

5,663

Net Income (INR million)

27,149

24,780

Debt (INR million)

84,745

106,160

Source: UCL, Ind-Ra

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

28 June 2017

18 August 2016

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Fund-based limits

Long-term/Short-term

INR20,000

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

-

Non-fund-based limits

Short-term

INR30,000

IND A1+

IND A1+

-

Non-convertible debentures*

Long-term

INR5,000

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

CP programme

Short-term

INR25,000

IND A1+

-

-

Short-term loans

Short-term

INR15,000

IND A1+

-

-

*Details in annexure

ANNEXURE

Instrument Type

ISIN

Date           of

Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

NCDs

INE481G07190

19 August 2016

7.53%

21 August 2026

INR5,000

IND AAA/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Amey Joshi

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001794

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121