Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank facilities of ACC Limited (ACC; part of the Adani group).

 

The ratings factor in the strong business risk profile by virtue of ACC and Ambuja Cements Ltd (Ambuja; ‘CRISIL AAA/Stable/CRISIL A1+’) being the second-largest cement group in India. The strong presence of the Adani group in coal, power and logistics verticals will result in structural reduction in cost of production of cement owing to synergy benefits strengthening the business risk profile over the medium term. The financial risk profile of the company will remain strong over the medium term supported by a debt-free balance sheet and robust liquidity. The promoter holding company of the Adani group had raised ~$6.3 billion to fund the acquisition of shares of Ambuja and ACC from Holcim Ltd through a mix of debt, equity and shareholder loans without any commitment from Ambuja and ACC to meet principal or interest obligation.

 

CRISIL Ratings has taken note of Ambuja Cements’ announcement on August 3, 2023, that it has entered into share purchase agreement to acquire 56.74% equity stake in Sanghi Industries Ltd (SIL) from its promoters. Ambuja Cement will also be making an open offer to acquire additional stake of up to 26% as per regulatory requirements. SIL is having clinker capacity of 6.6 MTPA, cement capacity of 6.1 MTPA, captive power plant of 130 MW, WHRS of 13 MW, and limestone reserves of 1 billion tons. The management has indicated that the acquisition will be at an enterprise value of Rs 5,000 crore and will be funded entirely through internal accruals.

 

CRISIL Ratings believes that the acquisition will further strengthen the market position of Ambuja Cements, increasing its consolidated grinding capacity to 73.6 MTPA from 67.5 MTPA and is in line with its medium-term plan to increase consolidated cement capacity to 140 MTPA by 2028. Also, given the suitable location of SIL facilities and its good quality of limestone reserves, the overall operating performance of Ambuja Cements could improve depending upon the pace of ramp of production and optimization of clinker manufacturing costs of the plant after the acquisition, which shall be a monitorable.

 

CRISIL Ratings is also continuously monitoring the developments following Hindenburg Research report on the Adani group published on January 24, 2023. While the ratings on ACC are driven by its strong business risk profile and robust debt protection metrics (owing to debt-free balance sheet), weakening in the credit risk profile of the Adani group may have implications for ACC’s credit risk profile and thus will be a rating sensitivity factor.

 

The new promoter group, along with the management, is looking to increase the consolidated cement capacity to 140 MTPA from 67.5 MTPA by 2028, through a mix of greenfield and brownfield expansions. It is also focusing on extracting synergies between both the companies as well as within the larger Adani group to reduce cost of production and generate superior cash accrual which shall also support capital expenditure (capex) plans. While the extent of improvement in cost of production from higher synergies remains a monitorable, CRISIL Ratings believes that the capex plans could anyways be funded via internal accruals, existing cash balance and share warrant money over the medium term and hence, does not expect leveraging of the balance sheet.

 

For the 15 months ended March 2023, consolidated sales volume stood at 69.09 MTPA (vs 53.2 MTPA in CY2021). However, the earnings before interest, tax, depreciation and amortisation (EBITDA) margin declined to 13.1% for 15 months ended March 2023 from 21.4% in CY2021, due to a steep rise in fuel prices and freight cost. The company has revised its financial year from January-December to April-March (accordingly, the financial year ended March 31, 2023, would be for 15 months starting from January 2022 to March 2023 and the current financial year would be for 12 months between April 2023 and March 2024). Profitability is likely to improve in fiscal 2024, owing to softening of coal and pet coke prices, better operational efficiency and enhanced synergies between Ambuja and ACC as well as with other group companies.

 

The ratings continue to reflect the strong pan-India market position of Ambuja and ACC, its robust operating efficiency and strong financial risk profile, driven by healthy cash flow and the debt-free position. These strengths are partially offset by susceptibility to the commoditised and cyclical nature of the cement industry. Substantial leveraging of the balance sheet or change in financial policies, which could weaken the financial risk profile, will be a key rating sensitivity factor.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Ambuja, ACC and all other subsidiaries/JVs/associates. This is because all these companies have a common line of business and management. They operate as one unit symbiotically and optimise each other's plant capacities and spare inventories, and thus, benefit from operational, managerial and financial synergies.

 

Debt in ultimate holding company/companies of ACC and of Ambuja has not been consolidated as it is non-recourse to these entities and will likely be serviced via cash flow streams at the promoter level not limited to dividends of either company.

 

Please refer annexure - list of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strong market position

ACC and Ambuja together had an installed capacity of 67.5 million tonne per annum (MTPA) as on June 30, 2023, with a pan-India presence making it the second largest group in the cement industry. The companies jointly hold 12-13% capacity share in the domestic market. They have 14 integrated units, 16 grinding units, 85 ready-mix concrete plants and more than 78,000 channel partners with nation-wide presence. These factors shield the operations from price volatility in regional markets and demand-supply imbalance.

 

Healthy operating efficiencies

Consolidated operating margin has been healthy, aided by high proportion of blended cement (around 88%), low clinker factor (nearly 60%) and power requirement (~60%) met captively through thermal power plants (TPPs), waste heat recovery system (WHRS) and wind/solar power. The company plans to further augment the power mix towards low-cost WHRS/wind/solar projects, so as to sustain its superior operating margin over the medium term and decarbonise the cement business.

 

For 15 months ended March 2023, consolidated EBITDA margin was 13.1% with adjusted ROCE of around 12%. While operating margin has dipped owing to a steep rise in input prices, it is likely to recover to around 20% over the medium term. Similarly, ROCE moderated in 15 months ended March 2023 owing to aggressive capex plans but will remain healthy at 13-15% over the medium term.

 

Strong financial risk profile

Reported networth of more than Rs 30,000 crore (including Rs 5,000 crore received against share warrants) and cash and equivalents of Rs 11,886 crore as on June 30, 2023, lend strength to the balance sheet at a consolidated level. Overall gearing too remained healthy. Strong cash flow and debt free position further translate into robust debt protection metrics.

 

The ultimate holding companies of cement business (i.e. of Ambuja and ACC) have outstanding debt of $3.8 billion with bullet repayments and semi-annual interest servicing. The management has articulated to service this debt from the existing liquidity and cash flows generated at the group level from interest and dividend income, along with refinancing of the principal amount. Further, the cash balance and cash accrual of ACC/Ambuja will be primarily utilised towards their growth capex. Therefore, the financial risk profile is expected to remain strong. However, any substantial increase in dividend or support to group/holding company from cash flows of ACC/Ambuja may potentially weaken the credit risk profile of these companies and thus, would be a key monitorable.

 

The company at a consolidated level is likely to incur a large capex of nearly Rs 22,000 crore over fiscals 2024 and 2025, towards capacity addition, captive power plants, plant maintenance and other infrastructure development. These are likely to be funded through internal accrual and existing liquidity. Further, Ambuja is also expected to receive Rs 15,000 crore in fiscals 2024 and 2025, as the balance sum pending towards the warrants issued. This will ensure negligible reliance on debt to fund capex.

 

In October 2022, Ambuja issued share warrants amounting to Rs 20,000 crore to the promoter group on a preferential basis and received Rs 5,000 crore as 25% payment towards the warrants.

 

Weakness:

Susceptibility to volatility in input cost and realisations, and cyclicality in the cement industry

Capacity addition in the cement industry is sporadic, given the long gestation period for setting up a facility and the large number of players adding capacity during the peak of a cycle. This has led to unfavourable price cycles in the past. Profitability also remains susceptible to volatility in input prices, including raw material, power, fuel, and freight cost. Increase in pet coke prices over the past year has impacted profitability of cement players. Realisations and profitability are also affected by demand, supply, offtake, and other regional factors. However, the initiatives to reduce cost and improve efficiencies will mitigate this risk some extent.

Liquidity: Superior

Under ACC, liquidity remains robust in the absence of external debt. Cash and equivalent stood at Rs 3,096 crore as on June 30, 2023. At Ambuja on a standalone level, cash and equivalent stood at Rs 8,634 crore as on June 30, 2023. Unutilised bank limit and healthy cash accrual will suffice to meet working capital requirement.

 

At a consolidated level, cash accrual of over Rs 5000 crore is expected per fiscal over the medium term. Accordingly, cash accrual and expected equity infusion would comfortably cover the capex requirement. This, coupled with robust cash balance, will ensure healthy liquidity.

Outlook: Stable

CRISIL Ratings believes ACC will maintain its strong financial risk profile over the medium term, supported by healthy cash accrual and low reliance on debt.

Rating Sensitivity factors

Downward factors

• Substantial leveraging of the balance sheet constraining the debt protection metrics
• Sustained decline in operating margin to less than 12%
• Any substantial increase in dividends or support to group/holding company, which weakens the financial risk profile

About the Company

ACC is the oldest cement company in India, with total installed capacity of 36.05 MTPA as of March 2023. The company also manufactures ready-mix concrete and has 50 plants across the country.

 

Ambuja is one of India’s leading cement manufacturers with an installed capacity of 31.45 MTPA as of March 2023. In January 2006, Holcim acquired a 14.8% stake in Ambuja. Following an open offer in April 2006, Holcim assumed management control of the company. Post restructuring between ACC and Ambuja, effective from August 12, 2016, ACC became a subsidiary of Ambuja.

 

On May 15, 2022, the Adani group and Holcim Ltd executed a share purchase agreement for purchase of the latter’s entire stake in Ambuja and ACC for a total consideration of Rs 50,181 crore (~$6.3 billion). This enabled entry of the Adani group into the cement business at second position in India, with a significant scale and strong brands. Subsequently, the board was reconstituted in September 2022 upon completion of the transaction.

Key Financial Indicators* (ACC Ltd – consolidated)

Particulars	Unit	2023#	2021^
Revenue	Rs crore	22,293	16,026
PAT	Rs crore	870	1,820
PAT Margin	%	3.9	11.4
Adjusted debt/adjusted networth	Times	0	0
Interest coverage	Times	30.32	62.54

*as per CRISIL Ratings-analytical adjustment

^Financials for the year ended December 31

#Financials for 15 months ended March 31

 

Key financial Indicators* (Ambuja Cements Ltd – Consolidated)

Particulars	Unit	2023#	2021^
Revenue	Rs crore	38,890	28,947
PAT	Rs crore	3,024	3,711
PAT Margin	%	7.8	12.8
Adjusted debt/adjusted networth	Times	0	0
Interest coverage	Times	37.51	56.04

*as per CRISIL Ratings-analytical adjustment

^Financials for the year ended December 31; includes consolidated numbers of ACC

#Financials for 15 months ended March 31; includes consolidated numbers of ACC

Any other information: Not applicable

Annexure - List of Entities Consolidated

*Subsidiaries of Ambuja Cements | ^ JV/Associate of Ambuja Cements