Indian Cement Rating Sector

1. Indian Cement Manufacturers
Risk in Financial Services

2. Sector Risk Profile
➢ The ratings for businesses in this industry range from "IND AA" to "IND BBB"
➢ They are subject to seasonality, fragmented market, the cyclical building sector, and high capital intensity
➢ The sector is particularly impacted by seasonality; demand often peaks around the festival season and the
end of the fiscal year (March to April) when government spending increases
➢ Due to the low value to weight of raw materials and finished goods, freight expenses make up a
considerable amount of manufacturing costs
➢ Locations that make it easier to create captive power or have access to fuel increase a company's ability
to compete on price
➢ Although the scale threshold is modest in the cement business, it requires a lot of cash. 50% of total
production capacity is under the hands of the top 5 manufacturers. Low product diversification, the
sheer number of businesses, and hefty upfront costs prevent competition from eroding each other's
margins
➢ Availability of coal is becoming more difficult as a result of power's competitiveness. Only factories
located along the coast may use imported coal. Profitability depends on having the capacity to control
the volatility of coal supply

3. Company Specific Traits
1. Location Driven Competitive Advantages
Since the industry needs a constant supply of limestone to make cement, Therefore,
businesses in those regions can lower their transit expenses. It also requires a constant supply of
energy and fuel for operations like crushing, grinding, and high-temperature heat treatment. For
new players, these restrictions raise entry hurdles. Therefore companies with some of these
advantages grew larger.
India Ratings evaluates each company's regional market position since it determines price setting
power, which in turn affects cash flow creation.

4. 2. Geographical Diversification and Regional Dynamics
Because building cycles can differ between markets, geographic diversity aids business in
removing the effects of a downturn in construction activity in a given location. Based on the
degree of diversification rating agency categorise the companies in different credit bands.
a. ‘IND AA’ - Production Facilities in more than 2 regions and revenue concentration of single
region less than 50%
b. ‘IND A’ - Multiple plants in single region and 50-80% revenue from single region.
c. ‘IND BBB and Below’ - Multiple plants in a single region with high concentration and
unprofitable operation size and more than 80% revenue is generated from region

5. 3. Operating Cost Position
Being cyclical by nature, the cement business concentrates on long-term competitiveness and low
production cost. Fuel (25-37%) and transportation (17-27%) are the two major expenses. Major
players forms long term contracts with the coal suppliers thus got uninterrupted and low cost
supply of fuel. This cost savings make big difference during the time of slowdown of demand.
Ratings Power and fuel cost drivers Freight cost drivers
‘IND AA’ Coal power > 80%, Diesel and
others < 20%
High control over transportation costs and
plants units closer to RM sources
‘IND A’ Coal Power 60-80%, Diesel and
others < 20-40%
Partial control over freight cost due to inter
unit clinker transfer
‘IND BBB’ and
Below
High % of merchant power and no
long term contracts with coal
suppliers
Limited control over freight. High
dependency over road transport than rail

6. Financial Profile
First and foremost, a weak financial profile would would likely put pressure on the rating, which would
lead to a final outcome in a lower rating category.
Financial factors might overshadow strong business and industry traits in a "weakest link" analysis.
Leverage and Coverage Ratios:
Due to the sector's high capital intensity, leverage is an important component in determining a
company's long-term creditworthiness and solvency.
1. Total adjusted debt net of cash/EBITDAR
IND AAA <1
IND AA 1-3
IND A 3-4
IND BBB 4-5
IND BB and below >5

7. 2. EBITDAR interest coverage ratio
IND AAA >8
IND AA >5-8
IND A 3-5
IND BBB 2-3
IND BB and below <2
● The interest coverage ratio
measures a company's
ability to handle its
outstanding debt.
Cash Flow and Liquidity
The agency considers internal cash generation a more robust credit protection measure than
external sources of capital.
Free cash flow (FCF) provides an indication of management’s strategy and appetite for credit risk.
The agency generally expects entities rated in the ‘IND AA’ and above categories to have limited
volatility through the cycle, reflecting management’s ability to maintain financial flexibility through
cash preservation measures and to maintain access to external funding during downturns.

8. IND AA and above 20
IND A 15
IND BBB 10
IND BB and below <10
CFO/revenue mid point (%)
It tells us how capable a
company is of generating
cash from revenue.
Profitability
Profitability levels and trends serve a number of analytical functions.
For example, they can be an indicator of a different sales mix, with each activity having distinct risk
and margin thresholds, and several operational factors (consistently high profitability can indicate a
low operating cost position, while declining margins over time may indicate rising costs of
production).
As with cash flow margins, profitability margins can vary widely among building materials issuers.
Cement manufacturers report the best margins.

9. IND AA and above 25
IND A 20
IND BBB 15
IND BB and below <15
A low EBITDAR margin indicates that
a business has profitability problems
as well as issues with cash flow. On
the other hand, a relatively high
EBITDA margin means that the
business earnings are stable.
EBITDAR margin
Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
21.8% 16.7% 23.5% 32.7% 27.3%
Regulatory Risks
The cement industry is exposed to risks related
to regulations governing land acquisition, mining
rights and environmental clearances.
The risks predominantly affect greenfield
projects but brownfield ones are not immune.
India Ratings views companies that begin
projects without securing the necessary captive
raw materials as inherently riskier.
Example of Shree Cement