Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the debt programmes and bank facilities of UltraTech Cement Limited (UltraTech).

 

The ratings continue to reflect the strong business and financial risk profiles of UltraTech, driven by its established position in the Indian cement business and focus on operating efficiency. Enhanced regional market share and successful ramp-up of acquired assets further aided the financial risk profile, which is evident from reducing leverage (net debt to earnings before interest, tax, depreciation and amortisation [EBITDA]). These strengths are partially offset by cyclicality in the cement industry.

 

For the expansion plan of setting up of 19.5 million tonne per annum (MTPA), of which 1.2 MTPA was commissioned during October 2021, cement grinding capacity is largely on track. Bulk of this addition is happening in Central and East India markets, which offer better growth prospects. Also, 72% of the new capacity is brownfield in nature and is supported by sufficient clinker capacity, resulting in lower capital costs and optimal cost mix, which are expected to result in better return on capital. These new capacities should be operational by end of fiscal 2023.

 

The ratings also factor in further strengthening of the domestic market share, with recent acquisitions and new capacity additions, and enhanced operational efficiencies on the merger of cement assets of Century, which was completed in the second quarter of fiscal 2020. While the company has successfully demonstrated its capability of turning around acquired capacities in the past, faster ramp-up of new capacities, extent of improvement in consolidated profit and debt reduction through strong cash accrual will remain key rating monitorables.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of UltraTech and its subsidiaries, including UltraTech Nathdwara Cement Ltd (UNCL; formerly Binani Cement Ltd). This is because the entities, collectively referred to as the UltraTech group, operate in cement and related space and have significant operational linkages and common management

 

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:

• Established market position in the Indian cement business and focus on operating efficiency

UltraTech is India's largest cement manufacturer with capacity market share of 24% - consolidated capacity of 118.0 MTPA as of November 2021, including UNCL and the cement business of Century. Operating efficiency is superior, driven by strong consumption norms, efficient logistics (because of pan-India presence) and captive power capability. The acquisition of UNCL strengthened UltraTech’s market position in North India. The takeover of Century's cement business has improved its position in the high-growth eastern market and reinforced its presence in other geographies. Furthermore, bulk of the planned capacity addition of 19.5 MTPA (of which 1.2 MTPA was commissioned during October 2021) being added in the central and eastern markets, would further consolidate its presence in these regions. Pan-India presence insulates the company from downtrend in any single region.

 

• Steady improvement in financial risk profile

UltraTech’s volumes grew nearly 24% year-on-year in the first half of fiscal 2022 owing to strong demand from the infrastructure sector and supported by low base. EBITDA/tonne during the first half of fiscal 2021 was flattish at Rs 1,395 as against Rs 1,375 during the corresponding period last fiscal. EBITDA/tonne is likely to be constrained during the second half of fiscal 2022 due to elevated cost pressure resulting from the rising coal and fuel prices.

 

Significant de-leveraging was undertaken during the first half of fiscal 2022, with gross debt at Rs 14,044 crore as on September 30, 2021 as against Rs 20,488 crore as on March 31, 2021. Overall net debt to EBITDA improved significantly to ~0.6 time in fiscal 2021 vis-à-vis 1.8 times in fiscal 2020, which is further expected to decline to ~0.4 time by end of fiscal 2022. Healthy profitability and superior brand position should continue to support the financial risk profile.

 

Weakness:

• Susceptibility to risks related to input cost, realisations and cyclicality in the cement industry

Capacity addition in the cement industry tends to be sporadic because of the long gestation period and large number of players adding capacity during the peak of a cycle. This led to unfavourable price cycles for the sector in the past. Moreover, profitability remains susceptible to volatility in the prices of inputs, including raw material, power, fuel and freight. Realisations and profitability are also constrained by demand, supply, sales and regional factors.

Liquidity: Superior

Financial flexibility has been strong, backed by healthy liquidity of over Rs 7,500 crore as on September 30, 2021. Liquidity declined from around Rs 13,500 crore as on March 31, 2021 as the company has prepaid/repaid debt worth about Rs 6,500 crore from the available treasury surplus. Longstanding relationship with banks and strong business positioning allow UltraTech to favourably raise debt at low interest cost. Healthy cash accrual over the medium term should comfortably cover not only maturing debt in fiscal 2022 and incremental working capital requirement but also support capital expenditure (capex) in fiscal 2022.

 

ESG Profile

CRISIL Ratings believes that Ultratech’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

The cement sector has a significant impact on the environment owing to higher emissions, waste generation and water consumption. This is because of energy intensive cement manufacturing process and its high dependence on natural resources such as limestone, coal as key raw materials. The sector has social impact due to its nature of operations affecting local community and health hazards involved. Ultratech has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• Ultratech has deployed strategies to reduce the carbon footprint in its entire production process. It aims 27% reduction in CO2 emissions per tonne by 2032 on base of fiscal 2017. On a base of fiscal 2017, the company has reduced CO2 emission by 6% till fiscal 2021, hence progressing towards the target. It aims to develop carbon neutral concrete by 2050.
• The company plans to increase the share of electricity requirements from combination of renewable energy sources and Waste Heat Recovery System (WHRS) to 34% by 2024 from the current level of 13%. Ultratech has joined RE100 initiative and committed for 100% renewable energy usage by 2050.
• Ultratech’s loss time injury frequency rate (LTIFR) of 0.03 is on lower side. The company has achieved its stated target to bring LTIFR below 0.25 by 2024.
• Ultratech has issued unsecured fixed-rate US Dollar denominated notes in the form of “Sustainability Linked Bonds” aggregating USD 400 million with an annual coupon of 2.8% due in February 2031. These bonds are linked to the ‘Sustainability Performance Target (SPT)’ of reducing greenhouse gas emissions by 22.2% by observation date in 2030 from a 2017 baseline. If the SPT is not achieved, the coupon will step up by 0.75% for the last two coupons.
• It’s governance structure is characterized by 50% of its board comprising independent directors, split in chairman and CEO position, dedicated investor grievance redressal system and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Ultratech’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to capital markets.

Outlook: Stable

UltraTech will continue to benefit from its healthy market position, geographically diverse presence in India and high financial flexibility.

Rating Sensitivity factors

Downward factors

• Lower-than-expected increase in cash accrual because of non-sustenance of performance
• More-than-expected debt because of sizeable acquisition or capex, or delay in reducing debt, leading to sustained net debt to EBITDA ratio of more than 3 times

About the Company

UltraTech was formed in 2004 following the acquisition of the cement business of Larsen and Toubro Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+') by Grasim Industries Ltd (Grasim; 'CRISIL AAA/Stable/CRISIL A1+'). As on September 30, 2021, Grasim (the flagship company of the Aditya Birla group) held 57.28% equity stake in UltraTech, the other promoter group held 2.76%, and financial institutions and the public held the rest. Through UltraTech Cement Middle East Investments Ltd (UCMEIL), UltraTech has capacity of 4 MTPA across the UAE and Bahrain.

 

UNCL has capacity of 6.25 MTPA in Rajasthan, comprising an integrated cement unit of 4.85 MTPA and a split grinding unit of 1.40 MTPA. Also, through its subsidiaries, UNCL has 2-MTPA clinker capacity in China and 2 MTPA and 0.3 MTPA grinding capacity in the UAE and China, respectively.

 

UltraTech's consolidated capacity is 116.8 MTPA, further to the merger of Century’s cement business. Century's assets are in Madhya Pradesh, West Bengal, Maharashtra and Chhattisgarh. Furthermore, the company is planning additional capacity of 19.5 MTPA spread across central, eastern and northern markets, taking overall capacity to 130.9 MTPA at the end of fiscal 2023.

 

For the six months ended September 30, 2021, UltraTech reported profit after tax (PAT) of Rs 3,010 crore and operating income of Rs 23,847 crore, against Rs 1,692 crore and Rs 18,021 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators*

As on/for the period ended March 31		2021	2020
Revenue	Rs crore	44635	42357
PAT	Rs crore	5462	5751
PAT margin	%	12.2	13.6
Adjusted debt/adjusted networth	Times	0.63	0.85
Interest coverage	Times	7.84	4.75

*Consolidated financials adjusted by CRISIL Ratings

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
INE481G07190	Debentures	22-Aug-16	7.53%	21-Aug-26	500	Simple	CRISIL AAA/Stable
INE481G08065	Debentures	4-Jun-19	7.64%	4-Jun-24	250	Simple	CRISIL AAA/Stable
INE481G08073	Debentures	11-Dec-19	6.72%	9-Dec-22	250	Simple	CRISIL AAA/Stable
INE481G08081	Debentures	20-Feb-20	6.68%	20-Feb-25	250	Simple	CRISIL AAA/Stable
INE481G08099	Debentures	05-Jan-21	4.57%	29-Dec-23	1000	Simple	CRISIL AAA/Stable
NA	Debentures*	NA	NA	NA	690	Simple	CRISIL AAA/Stable
NA	Commercial paper	NA	NA	7-365 days	5000	Simple	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	12,678.33	NA	CRISIL AAA/Stable
NA	External Commercial Borrowings1	NA	NA	Mar-23	65.07	NA	CRISIL AAA/Stable
NA	External Commercial Borrowings2	NA	NA	Feb-23	128.30	NA	CRISIL AAA/Stable
NA	External Commercial Borrowings3	NA	NA	Feb-23	128.30	NA	CRISIL AAA/Stable

*Yet to be issued

Annexure – List of entities consolidated

Sr no	Subsidiary companies	Extent of consolidation	Rationale for consolidation
1	Dakshin Cements Ltd^	100	Subsidiary
2	Harish Cement Ltd	100	Subsidiary
3	Gotan Limestone Khanij Udyog Pvt Ltd	100	Subsidiary
4	Bhagwati Lime Stone Company Pvt Ltd	100	Subsidiary
5	UltraTech Cement Lanka Pvt Ltd	80	Subsidiary
6	UCMEIL (Standalone)	100	Subsidiary
7	Star Cement Co LLC, Dubai @	100	Subsidiary
8	Arabian Cement Industry LLC, Abu Dhabi @	100	Subsidiary
9	Star Cement Co LLC, Ras Al Khaimah @	100	Subsidiary
10	Al Nakhla Crushers LLC, Fujairah @	100	Subsidiary
11	UltraTech Cement Bahrain Company WLL, Bahrain @	100	Subsidiary
12	PT UltraTech Mining Indonesia	80	Subsidiary
13	PT UltraTech Investment Indonesia	100	Subsidiary
14	PT UltraTech Cement Indonesia	99	Subsidiary
15	UNCL	100	Subsidiary
16	Krishna Holdings Pte Ltd (KHL) #$	UNCL- 55.54 MHL-44.46	Subsidiary
17	Mukundan Holdings Ltd (MHL) #$	100	Subsidiary
18	Murari Holdings Ltd (MUHL) #$	100	Subsidiary
19	Swiss Merchandise Infrastructure Ltd #	100	Subsidiary
20	Merit Plaza Ltd #	100	Subsidiary
21	Bhumi Resources (Singapore) Pte Ltd (Bhumi) #$	100	Subsidiary
22	Smooth Energy Pvt Ltd #^^	100	Subsidiary
23	Star Super Cement Industries LLC (SSCI)@@	UNCEIL-100	Subsidiary
24	Shandong Binani Rongan Cement Co. Ltd. (SBRCC) #$	KHL- 92.5	Subsidiary
25	PT Anggana Energy Resources #$	Bhumi - 100	Subsidiary
26	BC Tradelink Ltd ##$	SSCI - 100	Subsidiary
27	Binani Cement Tanzania Ltd ##$	SSCI - 100	Subsidiary
28	Binani Cement (Uganda) Ltd ##$	SSCI - 100	Subsidiary
29	Bahar Ready Mix Concrete Ltd #^^	100	Subsidiary
30	3B Binani Glassfibre Sari, Luxemburg (“3B”)*$	100	Subsidiary
31	Project Bird Holding II Sarl Luxemburg, (PBH)*$	3B-100	Subsidiary
32	Tunfib Sarl*$	PBH-67%	Subsidiary
33	Goa Glass Fibre Ltd*$	3B-100	Subsidiary
34	3B-Fibreglass Srl, Belgium*$	PBH-100	Subsidiary
35	3B-Fibreglass A/s Norway*$	PBH-100

@ Subsidiaries of UCMEIL

@@ Earlier 51% held by MHL and 49% held by MUHL; Subsidiary of UCMEIL w.e.f November 23, 2020

# Subsidiaries of UNCL

## Wholly owned subsidiaries of SSCI

^ Struck off as on April 09, 2021

^^ Applied for strike off

$ These have been classified as assets held for sale

*  Subsidiary of UNCL w.e.f. March 12, 2021

PT UltraTech Mining Sumatra is yet to start operations and has no equity infusion