CRISIL has assigned a rating of ‘AAA/Stable’ to the non-convertible debentures of UltraTech Cement Ltd (UltraTech), and has reaffirmed its outstanding ratings on the company’s other debt programmes and bank facilities. The ratings reflect Grasim Industries Ltd’s (Grasim’s) ownership of UltraTech, and the companies’ common line of business; these serve as incentives for Grasim to support UltraTech in times of distress, a position which is articulated by Grasim. CRISIL believes that both Grasim and UltraTech will operate symbiotically, exploiting synergies, both on the operating and financial fronts. These rating strengths are partially offset by UltraTech’s average operating efficiency and modest financial risk profile.

For arriving at the ratings, CRISIL has combined the financials of UltraTech and its subsidiaries, Dakshin Cements Ltd and UltraTech Ceylinco Pvt Ltd, owing to their common management and strong business synergies. CRISIL has also combined the business profiles of UltraTech and Grasim in its analysis of UltraTech’s credit risk profile.

UltraTech is an important part of Grasim’s growth plans. The UltraTech–Grasim combine is the eleventh-largest cement producer globally, and the second-largest cement combine in India, with a share of nearly 20 per cent of the domestic market, as on date. The two companies have operational synergies in several fields, including procurement of raw materials, manufacturing, common branding, dealer networking, logistics, and exchange of key personnel. The combine enjoys market shares of around 31 per cent in the western region, and around 15 per cent in the southern region; the robust market position and strong customer recall enhance the combine’s pricing flexibility.

UltraTech’s operating margins are likely to be adversely affected in the light of rising raw material and fuel costs, along with pressures on domestic realisations. In 2007-08 (refers to financial year, April 1 to March 31), the company has a modest capital structure, with a consolidated gearing of 0.64 times as on March 31, 2008. It had net cash accruals to total debt and interest coverage ratios of 0.68 times and 28.46 times, respectively, in 2007-08. CRISIL believes that UltraTech’s capital structure will remain constrained over the medium term, given the company’s large capital expenditure plans of around Rs.24 billion for the next three years.

Outlook:Stable
CRISIL believes that UltraTech’s business performance will improve over the medium term, on the back of Grasim’s acquisition of UltraTech, and improving market scenario. The outlook may be revised to ‘Negative’ if Grasim’s credit risk profile or UltraTech’s financial risk profile weakens considerably from current levels.

About UltraTech:
UltraTech and its parent, Grasim, form the second-largest cement combine in the country. UltraTech had an installed capacity of 18.2 million tonnes per annum (mtpa) as on March 31, 2008. Following the commissioning of the 4.9 mtpa of cement capacity at Andhra Pradesh (including split grinding unit at Ginigera, Karnataka), the company’s total capacity will increase to 23.1 mtpa by end of 2008-09. The company is setting up 227 MW of thermal power plants at its facilities in Andhra Pradesh, Gujarat, Chhattisgarh and Maharashtra, which are expected to result in cost savings and higher profitability. In 2007-08, the company set up 15 ready-mix concrete plants throughout the country.

UltraTech was formed following the acquisition by Grasim of Larsen & Toubro Ltd’s cement business in May 2004. Grasim, the flagship company of the Aditya Birla group, holds a 54.4 per cent stake in UltraTech. Grasim has a presence in diversified businesses such as cement, viscose staple fibre (VSF), chemicals, textiles, and sponge iron. For the year ended March 31, 2008, UltraTech, at the consolidated level, reported a net profit of Rs.10.1 billion on revenues of Rs.56.8 billion, as against a net profit of Rs.7.8 billion on revenues of Rs.49.9 billion in 2006-07.