What Could Change the Outlook

213 Outlook: Indian Cement Manufacturers Fragile Recovery; Smaller Players Unlikely to Benefit Outlook Report Building Materials & Construction Rating Outlook S T A B L E T O N E G A T I V E Rating Outlook Strengthening Bipolarisation: India Ratings has revised its outlook for the Indian cement manufacturers to stable to negative for 213 from negative in 212. downside risk for demand is the key driver for the outlook improvement. India Ratings expects EBITDA margins for integrated players (essentially the top five companies) for FY13 to be in the range of 23%- 24%, in line with FY12 margins. These companies are expected to maintain stable credit profile. However, margins of smaller players are expected to be in the range of 17%-19%, lower than median margins of 21% in FY12. The credit profile of such small non-integrated players may experience some pressure. Demand Stabilisation: Given the slight moderation in credit growth in the housing and commercial real estate sector, India Ratings expects the cement demand to grow between 5%- 8% yoy in 213. Overall Capacity Utilisations Bottomed Out: Given the expected stabilisation in demand, capacity utilisations may have bottomed out at around 71% in FY12. This is in line with the agency s 212 outlook. However, South Indian companies may continue to experience pressure on capacity utilisations. This is due to the demand-supply gap in the region. Impact on Credit Profiles: In FY12 and H1FY13, median EBITDA interest coverage ratio improved for both integrated (FY12: 13x, FY11: 1x) and small players (FY12: 3.8x, FY11: 2.7x) on the back of improved EBITDA margins. Based on H1FY13 margins, coverage ratios are unlikely to improve significantly in FY13. Median leverage (net debt/ebitda) for integrated players will show marginal improvement while small players leverage is unlikely to improve in 213. Consolidation for the Deserving: Structural industry aspects such as overcapacity and emerging regulatory trends may further intensify the consolidation in the industry. Consolidation targets are more likely to be companies with at least some strength, either with respect to access to resource (raw material and power/fuel) or proximity to relatively underserved markets. What Could Change the Outlook Supportive Policy Action: Government policies to check fiscal deficit and support higher incremental investment in the country may translate into higher industrial capex. A minimal rate cut in the range of bp-75bp may have a limited positive impact on the housing sector and thus on the cement demand. Related Research Other Outlooks www.indiaratings.co.in.com/outlooks Analysts Amey Joshi +91 22 4 1794 amey.joshi@indiaratings.co.in Fiscal Loosening: Populist budget in 213, driven by the 214 general election, may impair investment sentiment with possibly an adverse impact on Industrial capex and the infrastructure sector. The housing sector demand may receive a short-term boost but that may fizzle out in a couple of quarters. The overall impact would be lower-than-expected cement demand and pressure on margins. Deep N Mukherjee +91 22 4 1721 deep.mukherjee@indiaratings.co.in www.indiaratings.co.in 1 January 213

Key Issues Recuperating Demand In India Ratings assessment, in the absence of any significant boost in infrastructure or real estate construction activity (which may be a result of a possible substantial reduction in interest rate), cement growth may remain in the range of 5%-8% in 213. Before 28-29, the cement demand in India was largely driven by infrastructure activity. However, from 21 the demand is driven more by the activity in the housing and commercial real estate sector (CRE). Before April 21, the cement demand growth showed a positive correlation (.33-.55) with credit growth to infrastructure, construction and roads sector, with a lag of three to six months. However, after April 21, the demand growth has shown a positive correlation (.3-.5) with credit growth of housing and commercial real estate sector, with a lag of six to nine months. Cement production volume grew significantly in 212, driven by a relatively robust activity in housing and commercial real estate. From September 21 to March 212, the average growth in credit to the housing sector was around % and credit growth to commercial real estate was around 16%. However, during March-November 212, credit growth to the housing sector moderated to 13%, while for CRE, credit growth averaged only 4%. This may imply a moderation in cement demand in the next six to nine months. Figure 1 Real Estate the Key Driver Post 21 Commercial real estate growth Housing overall Cement production growth 75 6 45 3 - Apr 8 Oct 8 Apr 9 Oct 9 Apr 1 Oct 1 Apr 11 Oct 11 Apr 12 Oct 12 Source: Reserve Bank Of India (RBI), India Ratings Figure 2 Infrastructure the Key Driver Pre 21 Construction Road Infra Cement production growth 9 75 6 45 3 - Apr 8 Oct 8 Apr 9 Oct 9 Apr 1 Oct 1 Apr 11 Oct 11 Apr 12 Oct 12 Source: RBI, India Ratings 213 Outlook: Indian Cement Manufacturers January 213 2

Figure 3 Cement Growth and GDP 14 12 1 8 6 4 2 Cement consumption (LHS) GDP (LHS) GDP multiplier (RHS) 26 27 28 29 21 211 212 Source: CMIE,CSO and India Ratings CMIE:Centre For Monitoring Indian Economy. CSO: Central Statistical Organisation 1.6 1.4 1.2 1..8.6.4.2. Capacity and Regional Imbalance Figure 4 Overcapacity and Capacity Utilisation (MT) 4 35 3 2 1 5 85% Capacity (LHS) Cement Production (LHS) Capacity Utilisation (RHS) 89% 74% 7% FY8 FY9 FY1 FY11 FY12 FY13(P) FY14(P) FY (P) 71% 72% 73% 75% 1 95 9 85 8 75 7 65 6 Source: CMIE, Industry Reports and India Ratings India Ratings expects the pace of capacity addition to decline in 213 since large capacity additions in anticipation of demand growth have already taken place during FY8-FY11. Growth in capacity additions is likely to be around 5%-6% in the next three years (FY12: around 5%). In line with India Ratings 212 outlook, overall capacity utilisation was 71% in FY12. Southern Indian companies capacity utilisation (FY12: 61%, FY11: 65%) is lower than that in other regions. The agency expects that capacity utilisation is unlikely to cross 7% till FY due to the continued demand-supply mismatch in this region. However, all India capacity utilisation is likely to improve with slow growth in capacity additions. Higher Input Cost and Pricing Pressure India Ratings expects the sector s realisation to decline by 5%-1% yoy in 213 given the expected moderation in demand compared with the demand surge observed in 212. Figure 5 Indexed Cost and Realisation Per Tonne (Index) 2 19 18 17 16 14 13 12 11 1 Raw material cost Freight and forwarding Power and fuel Realisation 28 29 21 211 212 Source: Company Reports and India Ratings 28- Base Year Value =1 213 Outlook: Indian Cement Manufacturers January 213 3

India Ratings has analysed 18 Indian cement companies comprising around 6% of total capacity as on FY12 to analyse trends in capacity utilisations and realisation per tonne and cost per tonne. Freight cost (17%-27% of cost of production) has increased substantially compared with raw material, power and fuel costs from FY1-FY12 due to a rise in diesel cost and high inflation. However, actual freight rate is likely to decline in 213 (refer 213 Outlook: India Auto Sector, dated 8 January 213) in a scenario of persistent weak economic condition, providing temporary relief to cement companies. Any increase in economic activity will however cause the freight rates to rise again. During FY12, increased realisation and total volume mitigated the rise in total costs. Median realisation for 18 companies increased to INR4,8 per tonne in FY12 (FY11: INR3,6 per tonne) while median sales volume increased to 5 million metric tonnes (4.38 million metric tonnes). However, median growth rate in realisation and total volume is slightly lower than the median growth rate in overall costs. Power and fuel costs have also increased from FY8-FY12 but at a slower pace compared with freights. The agency expects mid-large size cement companies to reduce their power and fuel costs with the increased use of captive power while smaller cements are vulnerable to volatility in international coal prices and currency rates, as most of them depend on international coal of high calorific value. Credit Profiles For large integrated players (essentially the top five), the agency expects EBITDA margins to remain around the FY12 levels (ranging between 23% and 24% on an average). Under a normal growth scenario, non-integrated players enjoy EBITDA margin bp-3bp below the median margin of the top five players. This is reflective of the cost structure-related inadequacy of non-integrated players. However, in years of stressed growth (such as FY11), the difference in median margin between the top five and the remaining players was in excess of 9bp. Any moderation in demand tends to have a disproportionately high and adverse impact on smaller non-integrated players. As per H1FY13 results, the difference between the median EBITDA margins of the top five players and the rest is over 65bp. Although the smaller players (particularly in South India) are likely to show marginally improved performance in H2FY13 based on the demand pattern observed historically, their margins will range between 17% to 19%. This is lower than the median margin of 21%, observed in FY12 for this subgroup. Based on H1FY13 margins, coverage ratios are unlikely to improve significantly in FY13. However, they are unlikely to deteriorate over FY12 levels. Median interest cost for group of 18 companies increased to INR796.6m in FY12 from INR581m in FY11. Figure 7 Credit Profiles- Integrated Players (Top 5) (x) 19 13 7 1 Median EBITDA interest coverage (LHS) Median EBITDA margins (RHS) FY1 FY11 FY12 H1'13 Source: Company Reports, India Ratings 3 28 26 24 22 2 Figure 6 Credit Profiles- India Ratings Rated Companies (x) 16 14 12 1 8 6 4 2 MedianEBITDA interest coverage (LHS) Median EBITDA margins (RHS) Median leverage (LHS) FY1 FY11 FY12 H113 Source: Company Reports, India Ratings 3 2 1 5 213 Outlook: Indian Cement Manufacturers January 213 4

Figure 9 Credit Profiles- Small Players (x) 19 13 7 1 Median EBITDA interest coverage (LHS) Median EBITDA margins (RHS) 3 2 1 5 FY1 FY11 FY12 H1'13 Source: Company Reports, India Ratings Figure 8 Credit Profiles- Group of 18 Companies Median EBITDA interest coverage (LHS) Median leverage (LHS) (x) Median EBITDA margins (RHS) 3 12 9 2 6 1 3 5 FY1 FY11 FY12 H113 Source: Company Reports, India Ratings Consolidation for the Deserving India Ratings expects consolidation in the cement industry in the medium-to-long-term with large M&A activities in the sector. The top five companies, constituting around 5% of the industry capacity, enjoy a better cost structure driven by significant vertical integration and locational advantage with respect to sourcing of raw materials and market access. Most other companies, because of lack of one or more of these factors, have a weaker competitive position. The industry economics and the regulatory actions exhibited by the Competition Commission of India may push marginal players to consolidate. However, not all marginal companies would be attracting acquirers. Companies with either access to resources (raw material and power/fuel) or proximity to relatively underserved markets or both are most likely to be targeted for consolidation. As the Indian cement industry is the second-largest producer in the world, it attracts many international cement companies. Many international players have already entered into the market by acquiring small stakes in the companies which have huge raw material sources or by aligning themselves with the companies in their future expansion plans. 212 Review ACC (ACC, IND AAA /Stable): India Ratings affirmed ACC s ratings in January 212. ACC s credit profile remained unchanged in 212, with EBITDA margins at 19% (end- December 21: 22%). For the nine months ended September 212, EBITDA margins were flat as 211 s. India Ratings expects ACC s credit profile to remain strong in the medium term due to its pan-india presence, strong liquidity and absence of any major capex plans. Ambuja Cements (ACL, IND AAA /Stable): India Ratings affirmed the ratings of ACL in January 212. ACL s credit profile remained unchanged since 212, with EBITDA margins at 23% (end-december 21: %). For the nine months ended September 212, EBITDA margins improved to 27%. India Ratings expects ACL s credit profile to remain strong due to its strong liquidity and pan-india presence. Rain Cements (RCL, IND A- /Stable): India Ratings revised RCL s Outlook to Stable from Negative in October 211. RCL s credit profile remained unchanged 212, with EBITDA margins improving to 22.3% (end December 21: 19.2%). However, margins declined to around 17% for nine months ended September 212. India Ratings expects RCL s credit profile to remain consistent with the current ratings due to absence of any major capex plans and zero debt despite decline in EBITDA margins. 213 Outlook: Indian Cement Manufacturers January 213 5

Appendix 1: India Ratings-Rated Cement Companies Figure 1 India Ratings-Rated Cement Companies National issuer Long term rating Outlook Short term rating ACC IND AAA Stable IND A1+ Ambuja Cements IND AAA Stable IND A1+ Rain Cements IND A Stable IND A1 Kalyanpur Cement IND D - - Source: India Ratings 213 Outlook: Indian Cement Manufacturers January 213 6

Appendix 2 Figure 11 Peer Comparison 212 Results Particulars ACC Ambuja Cements Rain Cements Kalyanpur Cement Long-term issuer rating IND AAA IND AAA IND A- IND D Outlook Stable Stable Stable Short-term issuer rating IND A1+ IND A1+ IND A1 Year end Dec-1 Dec-1 Dec-1 Mar-12 Installed capacity (in mn tonnes) 28.7 27.35 2.9 1 Revenue (INR m) 1,123.3 85,132. 8,685. 1,94. EBITDA (INR m) 19,212.3 19,948. 1,937. -454.1 Interest expenses (INR m) 969.1 535. 12. 112.3 Net debt (INR m) -23,46.2-27,747. 1,67. 1,384.4 EBITDA margins 19.2 23.4 22.3-23.8 EBITDA interest coverage (x) 19.8 37.3 16.1-4. Net debt/ebitda(x) -1.2-1.4.9-3. EBITDA per tonne (INR) 89.6 954. 88.3-7.1 Source: India Ratings Figure 12 Peer Comparison Latest Results Particulars ACC Ambuja Cements Rain Cements Kalyanpur Cement Long-term issuer rating IND AAA IND AAA IND A- IND D Outlook Stable Stable Stable Short-term issuer rating IND A1+ IND A1+ IND A1 Period end 9MCY12 9MCY12 9MCY12 6MFY12 Revenue (INR m) 85,9.8 74,95.9 7,29. 1,359.6 EBITDA (INR m) 18,39.7 2,228.9 1,194.9-28.2 Interest expenses (INR m) 875. 513.9 114.1 73.6 Net debt (INR m) n.a. n.a. 1,836.2 956. EBITDA margins 21. 27.3 17. -2.1 EBITDA interest coverage (x) 2.6 39.4 1.5 -.4 Net debt/ebitda (x) n.a. n.a. 1.5-33.9 EBITDA per tonne (INR) 989.6 1,235.2 682.8 n.a. Source: India Ratings 213 Outlook: Indian Cement Manufacturers January 213 7

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