By Shochis Natrajan

India Ratings and Research (Ind-Ra) has rated UltraTech Cement Limited’s (UCL) additional commercial paper (CP) programme as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP*

-

-

Up to 12 months

INR10,000

IND A1+

Assigned

*The CP proceeds will be used for fulfilling 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 (89.0mmtpa of grey cement) and market share (FY17: around 21%). 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 heat rate for coal consumption was 708kcal/kg for 9MFY18 and electricity consumption was 79kWh, among the lowest in the industry. The company meets 85% of its power requirement through captive power plants and waste heat recovery systems. Pet coke usage was around 70% of the total requirements as of 3QFY18. UCL’s freight costs (per tonne of 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. 

Cement Demand Likely to Improve in FY19:
Ind-Ra expects the cement industry to grow around 3% during FY19. 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 likely to aid cement demand. 

Asset Acquisition and Additional Synergies:
UCL had entered into an agreement with Jaiprakash Associates Ltd (JAL) in 2014 to acquire its cement assets (21.2mtpa including an under construction 4.1mtpa grinding capacity) for a consideration of INR162 billion, largely transfer of debt. UCL completed this acquisition during June 2017. This has provided additional diversification to UCL with increased presence in central India, coastal Andhra Pradesh, Uttarakhand and Himachal Pradesh. This acquisition has also resulted in an increase UCL’s market share to close to 21% in India. 

The acquired assets had achieved a capacity utilisation rate of 51% in 3QFY18 which increased to 60% in December 2017. The management expects the acquired assets to turnaround over the medium term, backed by cost optimisation, enhanced logistics synergies, network development initiatives and brand premium in new markets. 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 a 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. 

Operational and Credit Metrics to Recover; Strong Liquidity:
The company recorded sales of INR219.9 billion for 9MFY18 and an EBITDA of INR43.64 billion. UCL’s net financial leverage (net debt/EBITDA) increased to 2.61x in 9MFY18 (FY17: 0.2x; FY16: 1.2x) with the addition of debt due to the JAL acquisition. Ind-Ra expects it to improve from FY19 resulting from an improvement in JAL’s standalone performance. The company has recorded positive cash flow from operations and free cash flows for more than a decade. 


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 remaining 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.

FINANCIAL SUMMARY
 

Particulars

9MFY18

FY17

FY16

Revenue (INR million)

219,900

253,749

251,532

Operating EBITDA

43,644

52,124

49,010

Gross interest expenses (INR million)

8884

6,401

5,663

Debt (INR million)

199,990

84,745

106,160

Source: UCL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

16 October 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

Short-term

INR35,000

IND A1+

IND A1+

-

Short-term loans

Short-term

INR15,000

IND A1+

IND A1+

-

* Details are provided 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 complexity level of the instrument, 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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Applicable Criteria

Analyst Names

  • Primary Analyst

    Shochis Natrajan

    Analyst
    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 40001788

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121