Rating Rationale

Strengths
* Established market position in the Indian cement business, and focus on operating efficiency
UltraTech is India's largest cement manufacturer with a capacity market share of 24%. The company has 113.35 million tonne per annum (mtpa) capacity in India, including UNCL, ongoing acquisition of the cement business of Century Textiles and Industries Ltd (Century; 'CRISIL AA/Rating Watch with Developing Implications/CRISIL A1+'), and expansion. Operating efficiency is superior, driven by strong consumption norms, efficient logistics (because of pan-India presence), and captive power capability. The acquisition of UNCL strengthens the market position in northern India, while the acquisition of Century's cement business should improve the position in the high-growth eastern market, and entrench its presence in other geographies. Pan-India presence insulates the company from downtrends in any single region.

* Financial risk profile to improve over the medium term
Though the debt-funded acquisition of the cement capacity of Jaiprakash Associates Ltd (JAL) and its subsidiary had moderated financial risk profile, healthy ramp-up in JAL's capacity utilisation and profitability reduced net debt to EBITDA ratio to 2.2 times by March 31, 2018, from cash surplus as on March 31, 2017.

In fiscal 2019, cost pressures increased because of higher commodity prices, which increased power & fuel and logistic costs, which constrained EBITDA. On the other hand, leverage increased due to the UNCL acquisition, which resulted in incremental consolidated net debt of Rs 8,000 crore. However, EBITDA improved in the fourth quarter of fiscal 2019 sequentially, driven by increase in overall capacity and utilisation, pick up in realisations, and softening of costs per tonne. As a result, net debt to EBITDA was at below 3 times by March 31, 2019.

Favourable demand outlook for cement, improved profitability of acquired assets through operational synergies, and superior brand positioning should continue to support the business. Although the proposed acquisition of Century is likely to add further debt of Rs 3,000 crore, mostly in the first half of fiscal 2020, it would be EBITDA-accretive. Thus, net debt to EBITDA ratio is likely to be less than 2.5 times by March 2020. The extent of improvement in consolidated profit and reduction in debt will continue to be monitored.

Weakness
* Susceptibility to risks relating 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 in 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 for the sector in the past. Moreover, profitability remains susceptible to volatility in the prices of inputs, including raw material, power, fuel, and freight. Rise in pet coke prices over the past years has impeded the profitability of several players. Realisations and profitability are also constrained by demand, supply, sales, and regional factors. Despite high volume growth and realisation being 4-5% higher, UltraTech's operating margin remained susceptible for the 18 months through December 2018, on account of higher power and fuel costs, and rising freight rates.