Rating Rationale

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 116.8 mtpa, 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 is being added in the central and eastern markets, which would further consolidated its presence in these regions. Pan-India presence insulates the company from downtrend in any single region.

* Steady improvement in the financial risk profile
In fiscal 2019, cost pressures increased because of higher commodity prices that expanded power and fuel and logistics costs, which constrained EBITDA. On the other hand, leverage increased because of the UNCL acquisition, which resulted in incremental consolidated net debt of around Rs 8,000 crore. As a result, the net debt to EBITDA ratio was 3 times by March 31, 2019.

Although the acquisition of Century added further debt of around Rs 2,800 crore in the first half of fiscal 2020, it is EBITDA-accretive. Easing cost pressures coupled with better realisations in fiscal 2020 have boosted EBIDTA. Healthy accrual has led to consolidated net debt decreasing from around Rs 22,111 crore in March 2019 to Rs 16,860 crore as on March 31, 2020, resulting in net debt to EBITDA ratio of 1.8 times compared to 3 times as on March 31, 2019.

UltraTech's volumes declined nearly 32% year-on-year in the first quarter of fiscal 2021 on account of the lockdown imposed to contain the Covid-19 pandemic. Subsequently, driven by gradual reopening of the economy, strong rural consumption and revival in infrastructure spending, volumes rose 8% year-on-year in the second quarter. Furthermore, benign input costs and fixed cost rationalisation aided operating margins with EBITDA per tonne rising to Rs 1,453 per tonne and Rs 1,387 per tonne, respectively, in the first and second quarters of fiscal 2021, compared to Rs 1,169 per tonne in fiscal 2020. As a result, net debt reduced from Rs 16,860 crore as on March 31, 2020, to Rs 12,132 crore as on September 30, 2020, with net debt to EBITDA ratio falling to nearly 1.3 times. Going forward, improved profitability of acquired assets through operational synergies and superior brand position should support the business risk profile. The extent of improvement in consolidated profit and reduction in debt will continue to be monitored.

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 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. Realisations and profitability are also constrained by demand, supply, sales and regional factors.