Birla Corporation Ltd.

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CRISIL and the Cement Industry

1. Introduction

CRISIL is India's leading Ratings, Research, Risk and Policy Advisory Company. At the
core of CRISIL are its unimpeachable credibility and unmatched analytical rigor.
Leveraging these core strengths CRISIL delivers opinions and solutions that:

• Make markets function better, and,

• Help clients mitigate and manage their business & financial risks
• Help shape public policy.

CRISIL offers domestic and international customers a unique combination of local

insights and global perspectives, delivering independent information, opinions and
solutions that help them make better informed business and investment decisions,
improve the efficiency of markets and market participants, and help shape
infrastructure policy and projects. Its integrated range of capabilities includes
credit ratings; research on India's economy, industries and companies;
investment research outsourcing; fund services; risk management and
infrastructure advisory services.

CRISIL's majority shareholder is Standard & Poor's, the world's foremost provider
of independent credit ratings, indices, risk evaluation, investment research and
data.

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CRISIL and the Cement Industry

2. Ratings Offered by CRISIL

A CRISIL credit rating indicates CRISIL’s current opinion of the profitability of default.
In other words, the credit rating indicated the probability of an investor in rated
instruments, or a lender o a rated entity, not receiving interest and principal
payments due on time and in accordance with the terms of the initial contract. The
probability is reflected in the form of an easily understandable alphabetical scale,
with ratings such as ‘AAA’, ‘AA’, ‘A’, or ‘BBB’.

A rating is assigned to debt alone and not to equity instruments. Typically,

instruments such as non convertible debentures, partially convertible debentures,
bonds, fixed deposits, commercial paper, short-term debt and structured
debentures, are rated. Entities issuing these instruments can also be rated on their
capacity to service their obligations on time.

Broadly, CRISIL’s credit ratings fall under four categories: long-term, short term,
fixed deposits and corporate credit ratings.

The term ‘long term instruments’ include bonds, debentures, other securities, term
loans, and other fund based and non fund based facilities with an original maturity
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of more than one year. Long term rating categories range from AAA to D; CRISIL
may apply + (plus) or – (minus) signs as suffixes to ratings from ‘AA’ to ‘C’ to reflect
the comparative standing within the range category.

The term Short term instruments refers to commercial papers, short term
debentures, certificates of deposits, working capital borrowings, and other fund
based and non fund based facilities with an original maturity of one year or less.
Short term rating categories range from ‘P1’ to ‘P5’; CRISIL may apply + (plus) or –
(minus) signs as suffixes to ratings from ‘P1’ to ‘P3’ to reflect the comparative
standing within the range category.

CRISIL assigns ratings to the fixed deposit programs of corporate banks and
financial institutions with the prefix, ‘F’. Fixed deposit rating categories range from
‘FAAA’ to ‘FD’; CRISIL may apply + (plus) or – (minus) signs as suffixes to ratings
from ‘FAA’ to ‘FC’ to reflect the comparative standing within the range category.

CRISIL also assigns corporate credit rating to issuers. The corporate credit rating
categories range from ‘CCR AAA’ to ‘CCR D’ and ‘CCR SD’ (indicating selective
default); CRISIL may apply + (plus) or – (minus) signs as suffixes to ratings from
‘CCR AA’ to ‘CCR C’ to reflect the comparative standing within the range category.

3. Rating For ACC Ltd.

Rs.4 Billion Non-Convertible Debenture Issue AAA/Stable
Rs.1 Billion Non-Convertible Debenture Issue AAA/Stable
Rs.1.50 Billion Cash Credit AAA/Stable
Rs.5.00 Billion Letter of Credit P1+
Rs.2.25 Billion Bank Guarantee P1+

CRISIL has assigned its rating of ‘AAA/Stable’ to ACC Ltd’s (ACC’s) non-convertible
debentures. The ratings on the company’s other debt programmes and bank
facilities have been reaffirmed at ‘AAA/Stable/P1+’. The ratings continue to reflect
ACC’s leading market position in cement, and its strong financial risk profile. These
rating strengths are partially offset by the commoditized and cyclical nature of the
cement industry.

For arriving at the ratings, CRISIL has combined the business and financial profiles
of ACC and Ambuja Cements Ltd (Ambuja Cements). This is because both the
companies have a substantive common shareholder, the international cement major
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Holcim Ltd. In CRISIL’s view, the common ownership and common line of business
create incentives for the companies to operate symbiotically, exploiting synergies
on the operating and financial fronts.

ACC is the largest cement producer in India, with a total capacity of 19.9 million
tonnes per annum (mtpa) across 14 units. The company has a large marketing
infrastructure and a pan-India presence, translating into an overall market share of
12.3 per cent. The nationwide presence de-risks ACC’s operations from regional
price volatility and demand-supply imbalances. Moreover, ACC’s cost structure has
improved significantly over the past few years, led by its stringent control over
power, fuel, and freight costs, and its voluntary retirement schemes for employees.
These factors have led to an improvement in its operating margins.

ACC has an exceptionally strong financial risk profile marked by strong cash flows,
healthy gearing, sound debt protection measures, and financial flexibility. In 2007
(refers to calendar year, January 1 to December 31), the company had net cash
accruals of Rs.13.02 billion. Its strong cash flows and superior profitability translate
into sound debt protection measures; its interest coverage and net cash accruals to
total debt ratios stood at 30.61 times and 4.14 times, respectively, for 2007. As on
December 31, 2007, the company had a gearing of 0.08 times.

CRISIL expects ACC to maintain its strong debt protection measures on the back of
its healthy earnings and cash flows and expected cost reduction because of
synergies with Ambuja Cements. Even if cement prices were to soften, ACC’s
financial risk profile would remain strong enough to support the rating at the current
level. Inorganic growth or higher-than-expected capital expenditure in an
unfavorable operating environment could strain the ACC-Ambuja Cements
combine’s financial risk profile; these have, therefore, been identified as key rating
sensitivity factors that could lead to a revision in outlook to ‘Negative’.

4. Rating of Ambuja Cement

Rs.5 Billion Proposed Long-Term Bank Loan Facilities AAA/Stable
Rs.1 Billion Short-Term Debt Programme P1+
Rs.0.15 Billion Non-Convertible Debenture Programme AAA/Stable
Rs.0.30 Billion Non-Convertible Debenture Programme AAA/Stable

CRISIL has assigned its bank loan rating of ‘AAA/Stable’ to the proposed bank
facilities of Ambuja Cements Ltd (Ambuja Cements), and has reaffirmed its rating on
the company’s short-term debt programme at ‘P1+’. The ratings continue to reflect
Ambuja Cements’ robust financial risk profile, superior operating efficiency, and
leading market position in northern and western India. For arriving at the ratings,
CRISIL has taken a consolidated view of the businesses of Ambuja Cements and ACC
Ltd (ACC), both of which have a substantive common shareholder, namely, the
international cement major, Holcim. In CRISIL’s view, the common ownership as well
as the common line of business holds incentives for both the Indian companies to
operate symbiotically, exploiting synergies on operating and financial fronts.
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Ambuja Cements has an exceptionally strong financial risk profile marked by strong
cash accruals, a healthy gearing, sound debt protection measures, and good
financial flexibility. Its strong cash flows and superior profitability translate into
sound debt protection measures: the interest coverage and the ratio of net cash
accruals to total debt (NCATD) for 2005-06 (refers to the 18-month period, July 1,
2005 to December 31, 2006) were 18.93 times and 1.13 times, respectively. CRISIL
estimates that, for 2007 (refers to calendar year, January 1 to December 31), the
interest coverage and the NCATD ratios were at 37 times and 4.3 times,
respectively. Also, as on December 31, 2006, the company had a gearing of 0.22
times; this is estimated to have improved to 0.07 times as on December 31, 2007.

Ambuja Cements has a strong presence in the western and northern regions of
India; it has market shares of around 17 per cent in both these regions. CRISIL
expects Ambuja Cements’ presence to be strengthened by its alliance with ACC,
which has a pan-India presence.

CRISIL expects Ambuja Cements to maintain its strong debt protection measures
over the medium term. Even if the market softens, the financial profile is likely to
remain strong enough to support the current rating. The outlook may be revised to
‘Negative’ if Holcim seeks to utilize Ambuja Cements’ financial resources to support
its group companies. Inorganic growth plans or higher-than-expected capital
expenditure in an unfavorable operating environment may strain the financial
profile; these have, therefore, been identified as key rating sensitivity factors.

5. Rating of KCP Limited

Rs.3321 Million Term Loan
A-/Stable
(Enhanced from Rs.936 Million)
Rs.425 Million Cash Credit
A-/Stable
(Enhanced from Rs.350 Million)
Rs.336 Million Letter of Credit/Bank Guarantee P2+

The KCP group was founded in 1941 by Mr. V Ramakrishna, a first-generation

entrepreneur who set up a sugar manufacturing unit. The company’s cement
division commenced operations in 1958. KCP operates a cement plant with a
capacity of 0.66 million tonnes per annum (mtpa) in Andhra Pradesh’s Guntur
district. The company is in the process of setting up additional capacity of 1.2 mtpa,
which will take its total cement capacity to 1.86 mtpa. The company’s heavy
engineering division was established in 1955 in Chennai (Tiruvottiyur). This division

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is involved in casting, fabrication, and machining heavy equipment for core

industries such as sugar, cement, steel, and power.

CRISIL’s ratings on The KCP Ltd’s (KCP’s) bank facilities continue to reflect the
buoyancy in cement business realizations because of robust demand in South India,
and the company’s strong market position in both cement and engineering
businesses. These rating strengths are partially offset by KCP’s planned debt-funded
capital expenditure (capex), which will adversely affect its existing capital structure,
and its diversification into new, unrelated businesses. For arriving at the ratings,
CRISIL has combined the financials of KCP and its subsidiaries, as all the entities are
under a common management and have operational linkages.

CRISIL believes that KCP will be able to maintain its sound debt protection measures
and will continue to see healthy earnings and cash flows over the medium term. The
outlook may be revised to ‘Positive’ if the company manages to strengthen its
market position in cement after the capacity expansion, while maintaining its
current operating margins. Conversely, it may be revised to ‘Negative’ in case the
company takes on more-than-expected debt to fund it capex or inorganic growth
plans, or seeks to increase its exposure to group entities.

6. Rating of Lafarge India

Rs.375 Million Cash Credit AA-/Stable
Rs.75 Million Working Capital Demand Loan AA-/Stable
Rs. 500 Million Letter of Credit* P1+
Non Convertible Debenture Aggregating Rs.950 Million AA-/Stable
Rs.1000 Million Short Term Debt Programme P1+

CRISIL has assigned its bank loan ratings of ‘AA-/Stable/P1+’ to the various bank
facilities of Lafarge India Pvt Ltd (Lafarge India). These ratings are driven by the
strong support that the company receives from its parent, Lafarge SA (rated
'BBB/A-2/Stable' by Standard & Poor’s), and Lafarge India’s strong market position
in eastern India and its improving operating efficiency. These rating strengths are,
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however, partially offset by Lafarge India’s large, debt-funded capital expenditure

(capex) plan. CRISIL has also withdrawn the ratings assigned to the short-term debt
and non-convertible debentures of the company, following a request from Lafarge
India. No amounts are outstanding against these instruments.

Lafarge SA has consistently extended managerial, technological, and financial

support to Lafarge India. The Lafarge group considers the Asia-Pacific region to be
strategically-important to its growth. Owing to India’s strong gross domestic product
(GDP) growth and healthy demand potential, Lafarge SA considers investing in India
important to its business.

Lafarge India is the third largest cement manufacturer in eastern India. Its strong
brand equity, as a result of its good quality products and innovative promotional
campaigns, helps it command a premium in price. CRISIL believes that with
expansion of capacity, Lafarge India will continue to generate stable revenues over
the medium term. Reduction in power consumption and transportation costs and
use of captive power have helped Lafarge India improve its operating efficiency.
However, Lafarge India’s large, debt-funded capex is likely to constrain significant
improvement in its capital structure. In the past, the company has had a highly-
leveraged capital structure, with a gearing of more than 1. Due to the borrowings to
fund the capex, the gearing is likely to remain high.

CRISIL believes that Lafarge India will continue to receive support from Lafarge SA
in the event of distress. Lafarge India is likely to generate stable revenues over the
medium term, backed by its strong market position. The outlook may be revised to
‘Positive’ if Lafarge India takes on lesser debt than expected to fund its capex
programme. Conversely, the outlook may be revised to ‘Negative’ if there are time
and cost overruns on Lafarge India’s projects, or if the company takes on more debt
than expected to fund its capex.

7. Rating of Madras Cement Ltd.

Rs.0.8 Billion* Non-Convertible Debentures Issue A+/Stable
Fixed Deposit Programme FAA-/Stable
Rs.1.45 Billion Short-Term Debt Programme P1

CRISIL’s rating on Madras Cements Ltd’s (Madras Cements’) debt programme

reflects the company’s strong market position in South India; healthy operating
efficiencies marked by low freight costs, low dependence on grid power; and
extensive use of blending. The ratings also factor in Madras Cements’ above-

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average operating margins and financial flexibility. These rating strengths are,
however, partially offset by expected delays in Madras Cements’ capital structure
improvement programmes and the company’s exposure to the loss-making Ramco
Systems.

Madras Cements is a leading cement manufacturer in South India and ranks second
in its core markets of Tamil Nadu and Kerala. The company’s operating efficiency
levels are the highest in the Indian cement industry. These factors, in conjunction
with a buoyant cement price outlook, underpin CRISIL’s expectation that Madras
Cements’ operating margins will improve despite fuel and freight cost pressures.
CRISIL believes that Madras Cements’ cost competitive operations give it a
competitive edge over its peers, enabling it to offset the impact of price volatility in
its markets. The company enjoys strong financial flexibility, as it has access to the
capital markets to refinance its existing debt and obtain debt at competitive interest
rates.

However, regular debt-funded expansions and support to Ramco Systems, a loss-

making group company, have impaired Madras Cements’ capital structure and
weakened its financial risk profile. The gearing as on March 31, 2007, adjusted for a
guarantee of Rs.890 million provided to Ramco Systems, was 1.02 times. Madras
Cements has a total exposure of Rs.1.09 billion in Ramco Systems, which amounts
to about 17 per cent of Madras Cements’ tangible net worth as on March 31, 2007.
However, given the group’s significant reliance on Madras Cements for financial
support, due to its status as the main revenue-generating company for the group,
the delayed financial improvement in Ramco Systems could lead to write-down of
this exposure over the medium term.

CRISIL expects that Madras Cements’ strong operating efficiencies and established
position in the cement market in southern India will help it counter the volatility
inherent to the industry. The outlook may be revised to positive if the company’s
capital structure undergoes material correction. Conversely, the outlook could be
revised to negative if cement realizations in South India deteriorate over the
medium term, either due to greater than expected capacity additions or a slowdown
in demand.

8. Rating for My Home Industries

Rs.400 Million Cash Credit Limits * AA-/Stable
Rs.570 Million Term Loans AA-/Stable
Rs.233 Million Letter of Credit P1+

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Rs.119 Million Bank Guarantee P1+

Rs.48 Million Proposed Short Term Bank Loan Facility P1+

Incorporated in 1984 as Devi Cements Ltd, MHIL got its present name after
promoter, Dr. J Rameswar Rao, acquired the shares of the other initial promoter, Dr.
Nani Gopal. Dr. Rao divested 42 per cent of his stake in MHIL to the Dublin-based
CRH group for Rs.13.37 billion in May 2008. The CRH group invested Rs.5.17 billion
in MHIL in May 2008, to increase its stake in the company to 50 per cent. The
company manufactures ordinary Portland cement (OPC) and Portland pozzolana
cement (PPC), and has three units with a combined capacity of 3.2 million tonnes
per annum. MHIL also owns a 15 mega watt (MW) captive power plant. MHIL’s
cement is marketed under the ‘MAHA’ brand. For 2007-08 (refers to financial year,
April 1 to March 31), MHIL reported a profit after tax (PAT) of Rs.1759 million on net
sales of Rs.7651 million, as against a PAT of Rs.910 million on net sales of Rs.4260
million for 2006-07.

CRISIL has assigned its ratings of ‘AA-/Stable/P1+’ to the various bank facilities of
My Home Industries Ltd (MHIL). The ratings reflect MHIL’s improving market position
in the cement industry, with leadership position in Andhra Pradesh, and healthy
operating efficiency, supported by backward integration for raw materials. The
ratings are underpinned by MHIL’s strong financial position, backed by a
comfortable capital structure and debt protection measures. These strengths are,
however, partially offset by MHIL’s exposure to risks relating to the cyclical and
commodity nature of the company’s business.

CRISIL expects MHIL to maintain its established market position in Andhra Pradesh,
and strong cash accruals. Substantial improvement in market position, backed by
geographical diversification initiatives, may lead to a revision in outlook to ‘Positive’.
Conversely, the outlook may be revised to ‘Negative’ in the event of large, debt-
funded capital expenditure, and unrelated diversifications.

9. Rating for Sagar Cement

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Rs.480 Million Cash Credit Limit BBB/Stable

Rs.2500 Million Term Loan Limits* BBB/Stable
Rs.35 Million Bank Guarantee P3+
Rs.115 Million Letter of Credit P3+

Sagar Cements began operations in 1985 with a single cement manufacturing unit
at Nalgonda, Andhra Pradesh, with an ordinary Portland cement (OPC) capacity of
60,000 tonnes per annum (TPA) and a clinker capacity of 66,000 TPA. Currently, SCL
has a clinker capacity of 550,000 TPA and cement capacity of 297,000 TPA. The
primary market for the Sagar brand is Hyderabad, Khammam, Nalgonda, Krishna,
and East and West Godavari districts. The company is expanding its cement and
clinker capacities by 2.2 million TPA and 1.5 million TPA. SPL has two hydel power
plants with a total capacity of 8.3 mega watt (MW). The group reported a profit after
tax (PAT) of Rs.331 million on net sales of Rs.2.231 billion in 2007-08 (refers to
financial year, April 1 to March 31), as against a PAT of Rs.312 million on net sales of
Rs.1.98 billion for the previous year

CRISIL has assigned its ratings of ‘BBB/Stable/P3+’ to the various bank facilities of
Sagar Cements Ltd (Sagar Cements). The ratings reflect Sagar Cements’ operating
efficiencies, supported by backward integration for raw material, and above-
average financial profile. These strengths are, however, partially offset by the
company’s marginal market position and exposure to cyclicality in, and commodity
nature of, the cement business.

CRISIL has combined the financials of Sagar Cements and its subsidiary, Sagar
Power Limited (SPL), for arriving at the ratings; this is because Sagar Cements and
SPL (referred to as the Sagar group) have strong operational linkages and are under
a common management.

The Sagar Group’s strong cash accruals will help it maintain its credit risk profile
despite its large capital expenditure (capex) plans. Aggressive debt funding of the
projects which are in planning stage or any debt-funded capital expenditure in
addition to that already expected may drive a change in outlook to ‘Negative’.
Conversely, an improvement in business profile of the company while maintaining
the above average financial profile may have a positive impact on the rating.

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10.Rating of Ultratech Cement Ltd.

Rs.1.44 Billion Long-Term Buyers’ Credit AAA/Stable
Rs.2.49 Billion Short-Term Buyers’ Credit P1+
USD100 Million Foreign Currency Loans
AAA/Stable
(Enhanced from USD60 Million)
Non-Convertible Debentures Aggregating Rs.10.65 Billion AAA/Stable
Rs.2.5 Billion Cash Credit AAA/Stable
Rs.1.0 Billion Short-Term Debt Programme P1+
Rs.6.0 Billion Letter of Credit P1+
Rs.1.5 Billion Bank Guarantee P1+

CRISIL has assigned its ratings of ‘AAA/Stable/P1+’ to UltraTech Cement Ltd’s

(UltraTech’s) buyers’ credit and foreign currency loan, and reaffirmed its ratings on
the company’s other debt programmes and bank facilities at ‘AAA/Stable/P1+’.
The ratings continue to reflect Grasim Industries Ltd’s (Grasim’s; rated
‘AAA/Stable/P1+’ by CRISIL) ownership of UltraTech, and the two companies’
common line of business; these serve as incentives for Grasim to support UltraTech
in times of distress. CRISIL believes that both Grasim and UltraTech will operate
symbiotically, exploiting synergies on both the operating and financial fronts. These
rating strengths are partially offset by UltraTech’s improving, but average, operating
efficiency and modest financial risk profile.

For arriving at its ratings, CRISIL has combined the financials of UltraTech and its
subsidiaries, Dakshin Cements Ltd and UltraTech Ceylinco Pvt Ltd, because of 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 17.4 per cent of the domestic market, as
on September 30, 2008. 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 has
market shares of around 28 per cent in the western region of India, and around 15
per cent in the southern region.

However, UltraTech’s operating margins are likely to be adversely affected in the

coming years because of the downturn in the cement industry and the subsequent
pressure on realizations. CRISIL believes that UltraTech’s capital structure will
remain constrained over the medium term, given the company’s large capital
expenditure (capex) plans of around Rs.18 billion, spread over the next three years.

UltraTech’s profitability is expected to be adversely affected in the medium term on

account of the downturn in the cement industry, however, CRISIL expects UltraTech
to maintain a robust credit risk profile on the back of operational and financial
support from parent, Grasim. The outlook may be revised to ‘Negative’ if Grasim’s

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credit risk profile or UltraTech’s financial risk profile weakens considerably from
current levels or, UltraTech undertakes higher than expected debt funded capex.

11.Rating of Grasim Industries

Rs.20.00 Billion Non Convertible Debenture # AAA/Stable
Rs.40.00 Billion Proposed Long Term Bank Loan Facility # AAA/Stable
Rs.6.00 Billion Short Term Debt Programme # P1+

CRISIL has assigned its ratings of ‘AAA/Stable/P1+’ to the debt programmes and
various bank facilities of Grasim Industries Ltd (Grasim). The ratings reflect the
strong combined market position of Grasim and its subsidiary UltraTech Cement Ltd
(UltraTech; rated ‘AAA/Stable/P1+’ by CRISIL) in the domestic cement market,
Grasim’s leading market position in the viscose staple fibre (VSF) business in India,
and its strong financial risk profile supported by healthy cash accruals. These rating
strengths are partially offset by the cyclical nature of the company’s businesses.

For arriving at the ratings, CRISIL has combined the financials of Grasim and its
subsidiaries, including UltraTech. CRISIL has also combined the business profiles of
Grasim and UltraTech, in its analysis of Grasim’s cement business.

The Grasim-UltraTech combine is the eleventh-largest cement producer globally,

and is slated to become the seventh-largest after completion of its expansion plans.
It is among the two largest cement combines in India, with a share of 17.4 per cent
of the domestic market as on September 30, 2008. The combine enjoys market
shares of around 28 per cent in the western region, and around 15 per cent in the
southern region. In VSF, Grasim is the sole producer in the domestic market, and
has 11 per cent global market share. Grasim’s presence across the VSF value chain
and strong backward integration, combined with its strong market position,
strengthen its VSF business.

However, Grasim’s operating margins are likely to be adversely affected in the

coming years on account of the downturn in the cement industry and the
subsequent pressure on realizations. Through 2007-08 (refers to financial year, April
1 to March 31), the company had a robust capital structure, with a consolidated
gearing of 0.68 times as on March 31, 2008. The debt protection measures are also
strong; for 2007-08, the ratio of net cash accruals to total debt (NCATD) and interest
coverage were at 0.65 times and 26.81 times, respectively. CRISIL believes that
Grasim will retain its robust financial risk profile over the medium term, as the
company will continue to post strong cash accruals and will have relatively small
fixed commitments, in the form of debt repayments and capital expenditure
(capex).

CRISIL expects Grasim to maintain its strong debt protection measures over the
medium term. Even if the market softens, the cash accruals are likely to remain
strong enough to support the current rating. The outlook may be revised to
‘Negative’ if Grasim announces capex that is significantly higher than expected, or

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announces any major inorganic growth plan or any material increase in exposure to
group companies from existing levels.

By Shobhit Chandak