Credit Agencies and Their Impact on Cement Industry

1. Introduction

"Credit rating agency" is a commercial concern engaged in the business of credit

rating of any debt obligation or of any project or program requiring finance, whether
in the form of debt or otherwise, and includes credit rating of any financial
obligation, instrument or security, which has the purpose of providing a potential
investor or any other person any information pertaining to the relative safety to
timely payment of interest or principal.

A credit rating defines the financial strength of a borrower and helps the investor
determine the likelihood that the bond issuer will pay coupon payments in a timely
fashion and more importantly the initial investment at maturity. There are two
major credit rating agencies; they are Standard & Poors and Moody. They both
conduct extensive research on the bond issuer before assigning a credit rating to
them. The bond rating will affect the interest rate that the issuer will need to pay
investors; the stronger the credit rating, the lower the interest expense for the
issuer.

Each of the credit rating agencies rate debt securities with a slightly different
ratings scale. Below, you will see what each of these agencies considers
investment grade and non-investment grade securities. Lower credit ratings are not
necessarily bad. In fact, many investors invest in lower grade securities to receive
higher yields. Due diligence must always be done when investing in any bond,
especially lower grade ones which are not investment grade.

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 Credit Agencies and Their Impact on Cement Industry

2. CARE

Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that
offers a wide range of rating and grading services across sectors. CARE has an
unparallel depth of expertise. CARE Ratings methodologies are in line with the best
international practices.

CARE Ratings has completed over 5307 rating assignments having aggregate value
of about Rs.14801 billion (as at December 2008), since its inception in April 1993.
CARE is recognized by Securities and Exchange Board of India (Sebi), Government
of India (GoI) and Reserve Bank of India (RBI) etc

CARE Ratings is well equipped to rate all types of debt instruments like Commercial
Paper, Fixed Deposit, Bonds, Debentures, Hybrid instruments, Structured
Obligations, Preference Shares, Loans, Asset Backed Securities(ABS), Residential
Mortgage Backed securities(RMBS) etc.

CARE Ratings has been recognized by statutory authorities and other agencies in
India for rating services. The authorities/agencies include: Securities and Exchange
Board of India (Sebi), Reserve Bank of India (RBI), Director General, Shipping and
Ministry of Petroleum and Natural Gas (MoPNG), Government of India (GoI), National
Housing Bank (NHB), National Bank for Agriculture and Rural development
(NABARD), National Small Scale Industries Commission (NSIC). CARE Ratings has
also been recognized by RBI as an Eligible Credit Rating Agency (ECRA) for Basel II
implementation in India.

CARE Ratings has significant presence in all sectors including Banks / FIs, Corporate,
Public finance. Coverage of CARE Ratings has extended to more than 1075 entities
over the past decade and is widely accepted by investors, issuers and other market
participants. CARE Ratings have evolved into a valuable tool for credit risk
assessment for institutional and other investors, and over the years CARE has
increasingly become a preferred rating agency.

CARE‘s Credit Rating is an opinion on the relative ability and willingness of an issuer
to make timely payments on specific debt or related obligations over the life of the
instrument. CARE rates rupee denominated debt of Indian companies and Indian
subsidiaries of multinational companies. CARE ratings are not recommendations to
buy/sell or hold any security.

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 Credit Agencies and Their Impact on Cement Industry

3. The Rating Process

The rating process takes about three to four weeks, depending on the complexity of
the assignment and the flow of information from the client. Rating decisions are
made by the Rating Committee.

FREQUENCY OF RATING ACTIONS

• The rating assigned is communicated to the client along with a detailed
rationale.
• The ratings accepted by the clients are published and then monitored on a
continuous basis over the life of the instrument.
• CARE has a comprehensive in-house data base which facilitates surveillance
of the various industries and companies operating in these industries.
• Each rating is reviewed formally at least once a year, when analysts meet the
issuer's management.

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 Credit Agencies and Their Impact on Cement Industry

• A review can also be triggered by a major development in the company or in

the industry, which may have a significant bearing on the credit-worthiness of
the company.
• As a part of the review exercise, actual financial performance is analyzed in
the light of the estimates made earlier and deviations are examined.
• CARE puts the rating under Credit Watch, when any event or deviation from
the expected trend has occurred or is expected and additional information is
necessary to take rating action.
The rating may be retained, upgraded or downgraded based on the changed
prospects for the issuer. A rating change is at the absolute discretion of CARE,
without concurrence of the client.

4. Why Choose CARE

Regulatory Recognition
CARE Ratings are recognized by Government of India and regulatory agencies in
India. CARE is registered with the Securities and Exchange Board of India. CARE
Ratings are also recognized by RBI, NABARD, NHB and NSIC. RBI has also recognized
CARE Ratings as an eligible external credit rating agency for the purpose of Basel II
implementation in India

Independent
CARE is an independent rating agency promoted by major banks and financial
institutions in India. The three largest shareholders of CARE are IDBI Bank, Canara
Bank and State Bank of India. CARE is a board managed company with eminent
professionals on the board. The entire Board comprises of Independent Directors.
CARE is the only rating agency in India which operates with an independent rating
committee comprising of senior and reputed professionals.

Professional
CARE Ratings endeavor has been to provide investors and risk managers with
independent, authentic and insightful credit opinions based on detailed in-depth
research, which encompasses detailed analysis of risks that affect credit quality of
an issuer. CARE's analyst strength consists of large number of well qualified and
multi-faceted professionals from diverse backgrounds such as; financial analysts,
economists, sector specialists, chartered accountants, chartered financial analysts
and financial risk managers. CARE is a founder member of the Association of Credit
Rating Agencies in Asia (ACRAA) and is actively in dialogue with Asian and
International rating agencies. This provides access to international know-how on
ratings

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Experienced
CARE has over a decade of experience in rating various types of instruments. CARE
assigned its first rating in November 1993 and upto March 31, 2007, CARE had
completed 5307 rating assignments for an aggregate value of about Rs 14801
billion.
With a large number of qualified and experienced multi-faceted analyst and
presence in all major metros of India, CARE has a unique understanding of the local
business, cultural and value systems and factors which affect the Indian economy.

Wide Sectoral Coverage

CARE is a full service rating company offering a wide range of rating and grading
services which includes rating debt instruments/enterprise ratings of Corporate,
Banks, Financial Institutions (FIs), Public Sector Undertakings (PSUs), State
Government bodies, Municipal Corporations, Non-banking Finance Companies
(NBFCs), SMEs, Micro finance institutions, Structured finance Securitization
transactions. In addition, CARE Ratings undertakes Corporate Governance ratings,
Mutual Fund Credit quality ratings, IPO grading, Claims Paying Ability rating of
Insurance Companies, Grading of Construction Entities and Issuer ratings.

Market Acceptance
CARE has a significant rating coverage of the Indian Banks and Financial
Institutions, who are also amongst the major investors in the Indian bond markets.
This acknowledges the confidence of Indian Institutional Investors in CARE Ratings.
CARE ratings are also used by a wide range of investors including Mutual Funds,
Insurance companies, Provident funds, Corporate and Retail investors.

5. Types of Ratings and Meaning

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6. Rating of Birla Corporation Ltd.

Bank Facilities Rating CARE AA/PR1+

Short Term Debt PR1+
LT Borrowing CARE AA
Short-Term Debt /Commercial Paper Program PR1+

CARE assigned ‘CARE AA’ (double A) rating to the long term and medium term bank
facilities and ‘PR1+’ (PR one plus) rating to the short-term bank facilities of Birla
Corporation Ltd (BCL). ‘CARE AA’ rating is applicable for facilities having tenure of
over one year and ‘PR1+’ rating is applicable for facilities having tenure up to one
year. These ratings are assigned to both short-term and long term bank facilities
aggregating Rs.500 crore. Also, CARE assigned ‘PR1+’ (PR one plus) rating to the
proposed short term debt programme up to Rs.25 crore.

In addition, CARE revalidated the ‘CARE AA’ (double A) rating assigned to the
proposed long term borrowing (LTB) programme of the company for Rs.25 crore. The
LTB would be repaid in five equal quarterly installments, after a moratorium of two
years from the date of availment. Further, CARE reaffirmed the ‘PR1+’ (PR one Plus)
rating assigned to the short-term debt (incl. commercial paper) programme of BCL
for an amount up to Rs.50 crore having a maturity up to three months. The STDs are
to be carved out of the tied-up working capital of the company.

Instruments with ‘CARE AA’ rating are considered to offer high safety for timely
servicing of debt obligations. Such instruments carry very low credit risk.
Instruments with ‘PR1+’ rating would have strong capacity for timely payment of
short-term debt obligations and carry lowest credit risk. The aforesaid ratings derive
strength from BCL’s very long track record, the professional management, increased
focus on highly profitable cement sales, established brands for cement, high cement
capacity utilization, captive limestone mines and power plants resulting in cost
saving, use of cheaper fuel in the form of pet coke, significant improvement in
profitability and financial position during the last three years, satisfactory overall
gearing & interest coverage and positive outlook for the cement industry. The
ratings also factor in unsatisfactory performance of various other divisions, risks
associated with implementation of ongoing projects, depressed demand for jute
goods and huge cement capacity additions expected by FY10. Volatility in input
prices and sustainability of cement price will remain the key rating sensitivities.

Financial Analysis

BCL improved its performance phenomenally in FY07 over FY06 on account of

significant growth in cement sales which continued in the current year as well. This
had a favorable impact on almost all the parameters of the company for FY07. Net
sales rose by about 29% in FY07 over FY06. PBILDT, however, grew stupendously by
round 176% during the same period, due to surge in cement AGSPR vis-à-vis
relatively lower increase in overall cost of sales (arising out of decline in power &

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fuel expenses and marginal increase in employee expenses). PBILDT margin

improved accordingly. The phenomenal jump in PBILDT, in the context of relatively
much lower increase in capital charge, had led to a substantial increase in PAT (both
before & after deferred taxation). Consequently, the PAT margin rose significantly.
Capital charge for the company has been low, mainly arising out of low gearing, and
the same surged by about 22% in FY07 over FY06. GCA of Rs.365 crore in FY07 was
very comfortable.

Both long-term debt-equity ratio and overall gearing (excluding deferred tax as a
part of debt) at 0.29 and 0.43 as on Mar.31, 2007 were comfortably low and
improved from those as on the previous account closing date. Substantially higher
profit led to a significant improvement in interest coverage as well during FY07.
Liquidity of the company has been adequate and the same is reflected in current
ratio as on the last three account closing dates. Further, the company had
substantial investment (Rs.402 crore as on Mar.31, 2007) in liquid debt mutual
funds, which can provide considerable cushion to the company in the event of
stress. BCL’s average utilization of bank limit has also been low (at around 50%)
during the last 12 months ended December, 2007. Average collection period and
average finished goods holding period have been quite comfortable and improved
further in FY07 over FY06.
Performance during the nine month period ended Dec.31, 2007 (M9FY08) was also
satisfactory with about 10% increase in net sales, backed by rising cement ANSPR.
Consequently, PBILDT rose at a much higher rate of about 33% during this period.
PAT (after defd. tax) advanced at a higher rate of 36.4%

Operations Analysis

BCL largely operates in north-western, eastern and central regions of the country.
Besides selling cement as a commodity product, BCL has established brands for
cement. Its major brands for cement are Birla Cement Samrat, Birla Cement
Khajuraho, Birla Cement Chetak, among others.

Cement sales, comprising lion’s share of total turnover, witnessed a y-o-y (year-on-
year) growth of 29.4% in FY07, fuelled by an increase in AGSPR by 28.8% (in line
with industry trend). While BCL’s dispatches remained almost at last year’s level
with no significant addition in capacity, the average cement price soared on the
back of increased demand arising out of buoyant economy and Govt. of India’s
continued thrust on infrastructure creation.

Despite 5.3% increase in AGSPR, the jute sales declined (by 11.6%) mainly due to a
16% fall in quantity sold, arising out of lack of demand. While high input and power
costs continue to pose major threats to this industry, labor woes for the industry
persist.

On the back of improved sales arising out of improved AGSPR and comparatively
lower rise in cost of sales, PBIT margin for cement division witnessed a substantial
improvement. Jute along with other divisions continued to be a drag on the
profitability of the company. Expenses on raw material consumption, which
accounted for 15.8% of total cost of sales in FY07 (against 15.5% in FY06), rose
7.2% in FY07 over FY06, mainly due to hike in average procurement price (APP) of
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 Credit Agencies and Their Impact on Cement Industry

major raw materials, especially gypsum and limestone. While limestone is sourced
from its captive mines at Chittorgarh and Satna, high grade limestone is also
purchased from the market. Power and fuel is another major cost component for
BCL. The company was able to gradually bring down (through process
improvements and use of pet coke) its average power consumption per tonne of
cement produced from 104 kWh/MT in FY98 to 83 kWh/MT in FY07. BCL’s two
captive thermal power plants of 27 MW each at Chittorgarh and Satna and another
one of 4 MW at Birlapur helped it in containing rising power costs.

7. Rating of Binani Cement

Non Convertible Debenture Issues CARE A-

CARE has upgraded the rating assigned to the Non Convertible Debenture (NCD)
issue of Rs. 70 crore of Binani Cement Ltd. (BCL) to “CARE A -” [Single A minus]
from “CARE BBB +” [Triple B Plus]. The NCDs have tenure of six years and would be
redeemable in quarterly installments commencing from March 31, 2007 and ending
on December 31, 2012.

CARE has also upgraded the rating assigned to the Non Convertible Debenture
(NCD) issue of Rs. 40 crore of BCL to “CARE A -” [Single A minus] from “CARE BBB
+” [Triple B Plus]. The NCDs have tenure of five years with two years moratorium
and repayment in 12 quarterly installments, commencing from September 30, 2008
and ending on June 30, 2011. Instruments with this rating are considered to offer
adequate safety for timely servicing of debt obligations. Such instruments carry low
credit risk.

The rating derives strength from Binani Cement Ltd’s good brand name in
Rajasthan, experienced management, favorable demand–supply position in its key
markets, capacity expansion plans approaching completion, healthy operating
margin, and location advantages. However the rating is constrained by the cyclical
nature of the industry, high financial leverage, threat from imports and future
Greenfield expansion plans leading to expected increase in financial commitments
& implementation risk there off.

Financial Analysis

BCL commenced operations in April 1997 with an initial capacity of 1.65 million tons
per annum (mtpa) of grey cement (Ordinary Portland Cement – OPC). Subsequently,
over the years, BCL augmented its cement capacity at Sirohi, Rajasthan, which was
2.25 mtpa as on March 31, 2007. The capacity is slated to rise to 5.3 mtpa involving
a capital expenditure of Rs. 575 crore. BCL has incurred a cost of Rs. 531.61 crore
for this expansion project till March 31, 2007. BCL is also setting up a split grinding
unit at Neem Ka Thana, North Rajasthan, to gain the advantage of proximity to the
northern markets and fly ash sources. This will take the total cement capacity to 6
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mtpa in FY08. BCL has plans to enhance its cement capacity in India to about 10 to
12 mtpa in the next three to four years and is evaluating Gujarat and Eastern India
as possible Greenfield locations.

In September 2005, JP Morgan Special Situations (Mauritius) Limited (JPMSSM)

acquired an equity stake in BCL by purchasing 25% of its equity from BIL for Rs. 120
crore. In July 2006, an arm of Credit Suisse Private Equity Partners Asia, L.P. acquired
10.09% equity stake in the company from BIL for Rs. 150 crore. In April 2007, BCL
came with an IPO, through which JPMSSM sold 10.09% paid up equity of BCL diluting
its stake in BCL to 14.91%, by an offer for sale. BCLs shares were listed on the NSE
and BSE on May 28, 2007 at its lower band of Rs. 75 per equity share. This issue did
not infuse any funds in the company as only equity holding of JPMSSM was diluted.
In August 2007, BCL acquired 70% stake with management control in M/s Krishna
Holdings Pte, Singapore which holds 70% stake in Shandong Binani Rongan Cement
Company Ltd, a Chinese joint with M/s Shandong Rongan Group Company Ltd, for
an initial investment of $ 11 million. BCL is planning to increase the capacity of the
Chinese company to 2.2 mtpa over the next two years and invest $100 million for
this purpose through a combination of debt and internal accruals.

Operations Analysis

BCL is one of the leading grey cement manufacturers in Rajasthan at Binanigram,

Pindwara, having market share of about 13% in Rajasthan and about 7% in Gujarat.
The company manufactures Ordinary Portland Cement (OPC) as well as the
Pozzolana Portland Cement (PPC) with a product mix of OPC: PPC of about 51:49 for
the year 2006-07.

Over a period of time, BCL has changed its product mix, skewing towards PPC as
PPC yields higher realizations. Its cement is marketed under the brand name of
“Binani”. BCL has various location advantages as the Sirohi facility is close to its raw
material (limestone) sources which are at distance of 2-7 kms from the plant. BCL
operates two limestone mines on a 20 year lease basis with lease expiring in 2015.
Also, the plant is well connected by road (NH – 14) to its primary markets, Rajasthan
and Gujarat. The company has recently completed work for railway siding and track
from the factory to Keshavganj, the nearest railway station. In terms of outward
freight, about 90% is sent through road and the balance through rail. BCL plans to
increase the contribution of its rail freight, so as to control its distribution expenses.

Power requirements of BCL are catered by a 25 MW thermal captive power plant,

which meets about 70-75% of the present power requirements of the company,
while the balance is drawn from the grid supplied by Jodhpur Vidyut Vitaran Nigam
Ltd. BCL is setting up two additional captive power plants (CPPs) of 22.3 MW each in
two phases at its existing location at Sirohi to cater to power demand from
expanded capacities and reduce dependence on state power. BCL has plans to shift
from coal to lignite for its captive power plant .It has been allotted Nimbri
Chandavan lignite block in Rajasthan by the Ministry of Coal.

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8. Rating Of J.K. Cement Ltd.

Commercial Paper / Short Term Debt PR1+
Long Term Bank Facilities CARE A
Short Term Bank Facilities PR1+

CARE has assigned a 'PR1+ [PR One Plus]' rating to proposed CP/STD aggregating
Rs.50cr. (within working capital limits) of J.K. Cement Ltd. (JKCL). CARE has also
assigned a 'PR1+' [PR One Plus] rating to the other Short Term Bank facilities of
JKCL. This rating is applicable for facilities having a tenure upto one year.
Instruments with this rating would have strong capacity for timely payment of short-
term debt obligations and carry lowest credit risk.

In addition, CARE has assigned a 'CARE A' [Single A] rating to the Long Term Bank
facilities of the company. This rating is applicable for facilities having tenure of more
than one year. Instruments with this rating are considered to offer adequate safety
for timely servicing of debt obligations. Such instruments carry low credit risk.
Details of the rated facilities are annexed. The rating takes into account strong
brand image, improving business position, favorable outlook of cement industry in
short to medium term and dominant position in white cement industry. The rating
also takes comfort from successful completion of various capacity augmentation
plans and progress in implementing various captive power projects leading to
increasing profitability in future. The rating also factors in relatively large expansion
plans in the subsidiary for which company has committed funds infusion as also
corporate guarantee for debt servicing.

Financial Analysis

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 Credit Agencies and Their Impact on Cement Industry

The company took over the operations of cement division of JKSL in Novemeber'04.
Thus, the financial results for FY'05 reflect only broken period's operations from
Nov'04 to Mar'05. Net sales of the company have increased by 41% during FY'07 as
compared to FY'06. The growth can be attributed to growth of the infrastructure and
real estate sector leading to higher demand of cement. This has resulted in higher
average sales realizations of grey cement, which has increased by 35% during FY'07
from the corresponding period previous year

Increase in Current Assets can be attributed to the cash lying with the company
from the proceeds of Public offer of equity shares. The same is being utilized for the
implementation of the power projects of the company.

Repayment of debts from the cash accruals of the company along with the addition
in net worth due to retained profit during the year has resulted in improvement in
overall gearing ratio further to 1.17 on March 31, 2007 from 1.69 on the last day of
previous year.

The company has an outstanding fund based limit of Rs.75cr. and non fund based
limit of Rs.30cr. from various banks led by consortium leader Allahabad Bank. The
company's fund based limit utilization has been varying during the year from 7% in
July 2007 to 86% in September 2006 with average utilization of 43%. The average
non-fund based utilization has also remained low at 27%. JK Cement has been given
an interest rate subsidy of 5% on loans taken for rehabilitation of the cement
division of JKSL, which is being shown directly in the balance sheet of the company.

Total income of the half year ended September 30, 2007, has registered a growth of
21% over the corresponding period mainly on account of robust realizations and
higher production. Profitability margins have registered impressive improvement
during this period on account of higher realizations and savings in power cost due to
electricity duty exemption.

Operations Analysis

JKCL is one of the largest suppliers of cement in the northern region, manufacturing
Ordinary Portland Cement (OPC) and Pozzolana Portland Cement (PPC). The plants
of the company have been working at high capacity utilizations. Grey cement sales
constituted around 80% of the total sales during the financial years FY'04 - FY'07.
Limestone, the major raw material, is sourced from the captive mines, which are
available to JKCL on a long term lease. Cost structure is dominated by power & fuel
and freight costs, which account for 63% of total operating cost. Cost of most of the
raw materials has increased during FY'07 including Gypsum and Fly-ash, due to
increased transportation cost.

Power requirements are met from Ajmer Vidyut Vitran Nigam Limited as well as from
its captive thermal power plants. The company has undertaken three power projects
with total project cost of Rs.205 crore funded out of public issue proceeds. After
completion of all these projects, company would become self sufficient for its power
requirements. JKCL has been granted an exemption of 50% in electricity duty
payable on grid power from the state government w.e.f. November 2004 resulting in
reduction of power tariff by Rs.0.20/unit, because of which the total cost of procured
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 Credit Agencies and Their Impact on Cement Industry

power has come down in FY07. JKCL has also entered into a Power Purchase
Agreement for supply of 15 MW power with Murudhar Power Pvt. Ltd. (MPPL- group
Power Company) for supply of power at a fixed rate of Rs.2.85 per unit for 15 years.
JKCL has taken a stake in MPPL. The plant is expected to be operational in 1-2 years.

Wide distribution network of JKCL consists of more than 4,000 stockiest, 29 sales
promoters and 40 handling agents. The company has earned a reputation among
cement purchasers by consistently supplying high quality products in the brand
names of J.K. Cement, J.K. Sarvashaktiman and J.K. Super for grey cement in its
principal market i.e. Northern India.

9. Rating of J.K. Lakshmi Cement Ltd.

Non Convertible Debenture issue CARE A+
Commercial Paper programme PR1+
Bank Facilities CARE A+/PR1+

CARE assigned 'CARE A+' (single A plus) rating to the proposed NCD (non-
convertible debenture) issue of Rs 60 cr of JK Lakshmi Cement Ltd. (JKLCL). This
rating is applicable for facilities having tenure of over one year. Instruments with
this rating are considered to offer adequate safety for timely servicing of debt
obligations and carry low credit risk. Also, CARE assigned 'PR1+' (PR one plus)
rating to the proposed CP (Commercial Paper) programme of Rs 20 cr of the
company. The proposed issue of CP would be within the existing working capital
limits of the company. Instruments with this rating would have strong capacity for
timely payment of short-term debt obligations and carry lowest credit risk.

Further, CARE assigned 'CARE A+' (single A plus) and 'PR1+' (PR One plus) rating to
the bank facilities aggregating Rs 654.44 cr of JKLCL. The ratings factor in JKLCL's
strong brand image in its market and improved financial performance. The rating
also takes comfort from the successful completion of capacity augmentation plans
along with captive power project, foray into RMC business and comfortable liquidity
position. The rating is, however, constrained
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 Credit Agencies and Their Impact on Cement Industry

By the company's medium size relative to other players in the region, risks
associated with ongoing and planned expansion, relatively higher gearing in
addition to the inherent cyclical nature of cement industry.

Financial Analysis

As compared to FY06 the Net Sales of the company has increased by 45% during
FY07. The growth can be attributed to growth of the infrastructure and real estate
sector leading to higher demand of cement. This resulted in higher average sales
realizations, which increased by 38% during FY07 from the corresponding period
previous year. PAT grew by over 3 times since last year due to higher sales
realizations coupled with increased operational efficiency.

Net fixed assets increased in FY07 due to addition of plant and machinery for
expansion. Increase in current assets over the years is on account of increase in
cash and bank balance with JKLCL due to improved sales realizations and
profitability. In FY07, the equity share capital increased due to issue of 37, 31,100
fully paid equity shares at par aggregating to Rs.3.73cr to financial institutions and
banks on conversion of their Rupee Term Loan. Also, JKLCL raised Rs.35cr by issue of
3589700 equity shares of Rs.10 each at a premium of Rs.87.5 per share to a group
company viz Fenner India by way of preferential allotment to part finance the cost
of captive power plant and other ongoing capital expenditure. Further, JKLCL issued
41,02,500 warrants on Jul. 31, 2006 by way of preferential allotment to Fenner
India, at a premium of Rs 87.5 per share and has received 10% of the issue price
(Rs. 4cr) which has been utilized for augmenting long-term resources of the
company. The unaudited half yearly results of JKLCL posted growth in total income
of about 53% and increase of 128% in PAT.

Operational Analysis

JKLCL is one of the biggest suppliers of cement in the Rajasthan and Gujarat region,
manufacturing OPC (Ordinary Portland Cement), PPC (Blended Cement) under the
brand name JK Lakshmi Cement. Recently, it started making RMC under the name of
JK Lakshmi RMC and trading in plaster of Paris by the name of JK Lakshmiplast.
JKLCL increased the installed capacity of cement in March 2007 to 3.4 mn mtpa by
installing an additional grinding capacity and modernization of the plant. The
present capacity of the plant is around 3.65 mn mtpa.

Limestone, the major raw material, is sourced from the captive mine, which is
available to JKLCL on long term, please. The company's cost structure is dominated
by power plus the fuel cost and freight which account for about 58% of the total
operating cost during FY07. The freight cost has increased due to ban on
overloading consequent to Supreme Court's order against overloading in November
2005. Besides, rail transportation cost also increased due to introduction of higher
freight during busy period (8 months in a year) and increase in demurrage-wharf
age by Railways.

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 Credit Agencies and Their Impact on Cement Industry

JKLCL's power requirement is met through Rajasthan State Electricity Board as well
as recently commissioned captive power plant. Besides, the company has DG sets
for generation of electricity as standby. The company has a wide network of 1,500
dealers served by 60 cement dumps strategically located in various states of North
and West India viz. Rajasthan, Gujarat, Delhi, Haryana, U.P, Uttaranchal, Punjab,
J&K, H.P. and Maharashtra (Mumbai).

10.Rating of Shree Cement Ltd.

Bank Facilities CARE AA/PR1+
STD issue PR1+
NCD issue CARE AA

CARE reaffirmed the ‘CARE AA’ (Double A) rating assigned to the long-term bank
loans of Rs.972.1 crore & the cash credit facility of Rs.140 crore and ‘PR1+’ (PR One
plus) rating assigned to the Bank Guarantee/ Letter of credit facility of Rs.60 crore of
SCL (Shree Cement Ltd.). While ‘CARE AA’ rating is applicable for facilities having
tenure of over one year, ‘PR1+’ rating is applicable for facilities having tenure up to
one year.

CARE also reaffirmed the ‘PR1+’ (PR one plus) rating assigned to the STD (short
term debt) programme of Rs.250 crore of SCL for a maturity period upto 90 days,
with daily put and call option and ‘CARE AA’ [Double A] rating assigned to the
outstanding Non-Convertible Debentures (NCDs) of Rs.8 crore of SCL. Further, CARE
revalidated the ‘CARE AA’ [Double A] rating assigned to the proposed NCD issue of
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 Credit Agencies and Their Impact on Cement Industry

Rs.100 crore of SCL, to be placed on a private placement basis. The proposed NCDs
shall be repaid in 20 equal quarterly installments after a moratorium of one year
from the date of allotment.

Instruments with ‘CARE AA’ rating are considered to offer adequate safety for timely
servicing of debt obligations. Such instruments carry low credit risk. Instruments
with ‘PR1+’ rating would have strong capacity for timely payment of short-term
debt obligations and carry lowest credit risk. ‘PR1+’ is CARE’s highest rating for
short term instruments.

Financial Analysis

Cement industry continued to grow, both in volume and value, during FY08 on the
back of strong demand. Accordingly, net sales in FY08, at Rs.2108 crore, grew at a
stupendous rate of 51% over FY07, on the back of increased tonnage sold and
higher ANSPR. However, PBILDT grew at a comparatively lower rate of about 49%
during the same period as SCL’s cost of sales witnessed relatively higher increase
(of about 54%) owing to substantial jump in freight costs and power & fuel
expenses. Consequently, PBILDT margin declined; although the PBILDT margin was
high at 42.4% in FY08. Capital charges soared by about 40% owing to increased
interest expenses and depreciation charge on account of commissioning of new
plants in the end of FY07 and in FY08.

Relatively higher increase in PBILDT vis-à-vis capital charges coupled with increase
in non-operating income on account of sale of carbon credits (2,00,000 units of
CERs) led to substantial growth (of 62.2%) in PAT (before defd. tax) level and
improved PAT (before defd tax) margin. GCA (gross cash accruals) at Rs.733.5 crore
was very satisfactory. In addition, the company had an amount of Rs.1007.7 crore in
mutual funds and fixed deposits as on Mar.31, 2008 indicating use of major part of
the borrowing for arbitrage purpose. If all these are adjusted, overall gearing would
be below unity. Interest coverage was quite satisfactory at 9.65 in FY08.

Despite increase in borrowings, total debt/GCA improved gradually over the last
three years in view of increasing and high level of GCA. Liquidity position of SCL, as
reflected in current ratio of 1.68 as on Mar.31, 2008 was satisfactory with
substantial amount invested in bank fixed deposits and mutual funds. Bank limit
utilization has also been very low at 2% during the last 12 months. Average
collection period and finished goods inventory period was comfortable.
Operational Analysis

SCL generally produces four grades of cement, viz., 53/ 43 / 33 grades Ordinary
Portland Cement (OPC) & Pozzolana Cement (PPC) and sells under the established
brand names ‘Shree’, ‘Shree Ultra’, ‘Bangur cement’ and ‘Tuff Cemento 3566’.
These brands have gained reputation in the market over the time and the company
continues to further build upon its brand equity through diverse media programmes
& schemes, thereby expanding market share which reached 3.3% in India and 16%
in north India, in FY08 (as against 3.1% and 13.7% in FY07). SCL primarily operates
in the states of Northern and some parts of Central India.

During FY08 as well, SCL performed well with improving operations and high
profitability margins. SCL’s capacity utilization during the year continued to remain
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 Credit Agencies and Their Impact on Cement Industry

over unity owing to blending of fly-ash with cement. Net sales in FY08 grew by more
than 51% over FY07 on the back of increase in sales quantity (by over 31%) as well
as surge in cement prices (by 15.3%). The increase in quantity sold was due to
continuous rise in demand in National Capital Region (NCR), which paved the way
for absorption of SCL’s increased cement output arising out of increase in capacity.
Prices remained buoyant on the back of various infrastructural development
activities being undertaken in NCR as also for rise in input prices. However, going
forward, capacity utilization and cement prices are expected to be under pressure in
the next two years, despite expected growth in demand in FY09, owing to large
capacity additions expected to be on stream by the end of FY09.

The major cost drivers for SCL are raw material expenses, power & fuel expenses
and freight expenses, which together comprised 81.6% of cost of sales in FY08.
Limestone, the major raw material for cement production, is fully sourced from
three captive leasehold mines having sufficient proven reserves located in close
proximity of its plants. Expenses on limestone declined in FY08 from FY07 owing to
availability of better quality of limestone at RAS mines. However, the transportation
cost jumped substantially and accounted for about 25% of SCL’s cost of sales in
FY08 (as against 19% in FY07) on account of increased freight charges as well as
change in mode of sales (from ex-factory to free-on road sales, i.e., inclusive of
transportation costs), fetching higher price realization. SCL has already set up a
grinding unit in Khushkhera to save on transportation costs for fly-ash and is setting
up another one at Suratgarh.

SCL’s plants are among the most energy efficient cement plants in the world with
average electricity consumption per tonne of cement produced being about 79 Kwh
in FY08. This was well within the industry benchmark level of around 110 Kwh/tonne
and benchmark level of around 85 Kwh/tonne for major cement players. On the fuel
front, SCL has been saving significantly due to use of pet coke (cheaper with high
calorific value), both in power and cement plants. The pet coke remnants of CPP are
used for substituting the original material required in clinkerisation process, thereby
reducing aggregate consumption cost of pet coke. Despite this, the power & fuel
expenses have been witnessing an uptrend in the past few years owing to increase
in business volume coupled with increasing pet coke and petroleum prices. While
increasing petroleum price is a matter of concern for all cement companies
(including SCL), the relatively higher increase in coal prices as compared to pet coke
prices puts SCL in better position as compared to its peers, using coal as fuel.

11.Rating of Grasim Industries Ltd.

Commercial Paper Issue/Short Term Debt Programme PR1+
Non Convertible Debenture Issue CARE AAA
Short Term Bank Facilities PR1+
Long Term Bank Facilities CARE AAA

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 Credit Agencies and Their Impact on Cement Industry

CARE has reaffirmed ‘PR1+’ (PR One Plus) rating assigned to the Commercial Paper
(CP)/ Mibor Linked Short Term Debt (STD) programmes of Rs.500 crore of Grasim
Industries Limited (Grasim). The CP/STD programme would be carved out of the
sanctioned working capital limits of the company. CARE has also reaffirmed ‘CARE
AAA’ (Triple A) rating assigned to the Long Term borrowing programme aggregating
Rs.2000 crore (inclusive of all outstanding NCDs) of Grasim.

Further, CARE has assigned a ‘CARE AAA’ (Triple A) rating to the Long Term Bank
Facilities of Grasim. This rating is applicable for facilities having tenure of more than
one year. CARE has also assigned ‘PR1+’ (PR One Plus) rating to the Short Term
Bank Facilities of Grasim. This rating is applicable for facilities having a tenure upto
one year. These ratings are assigned to both short term and long term bank
facilities aggregating to Rs.3, 503 crore (inclusive of all outstanding loan facilities).
Instruments with CARE AAA rating are considered to be of the best credit quality,
offering highest safety for timely servicing of debt obligations. Such instruments
carry minimal credit risk.

Instruments with PR1+ rating would have strong capacity for timely payment of
short-term debt obligations and carry lowest credit risk. The ratings factor in proven
track record of the well established and experienced promoter group, company’s
leadership position in cement and Viscose Staple Fibre (VSF) businesses, diversified
operations, strong brand image, upturn in the cement cycle, robust and
continuously strengthening financial position and limited debt funded capex plans.
Improvement in the

Financial Analysis

Net sales grew at 29% in FY’07, as compared to the previous year, mainly on
account of excellent performance of the cement and VSF divisions. Textile and
sponge iron segments recorded modest YoY growth. In FY’07, operating PBILDT
showed a significant rise of about 68% mainly on account of strong growth in
cement and VSF business. Sponge iron, textiles, and chemicals divisions recorded
low operating PBILDT numbers. Overall PBILDT margin increased from 21% to 28%
riding on increased realizations in the cement and VSF divisions.

Strong performance was also reflected in the PAT, which rose by 78% during FY’07
as cement and VSF businesses posted healthy results and also due to relatively less
rise in the depreciation and interest cost. Grasim’s Long term Debt Equity ratio
improved to 0.45 as on March 31, 2007 from 0.47 as on March 31, 2006. It has been
moderate over last four years, improving gradually from 0.65 to 0.45. Overall
gearing has increased marginally from 0.51 as on March 31, 2006 to 0.57 as on
March 31, 2007. Interest coverage further improved from 11 times in FY’06 to 19
times in FY’07, due to higher growth in margins and relatively lower increase in
interest expenses.

Operations Analysis
(Considering Cement Only)
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 Credit Agencies and Their Impact on Cement Industry

Grasim along with its subsidiaries has combined capacities of about 31 million TPA
which makes it the 2nd largest cement producer in India. Grasim with its 11
composite plants, seven split grinding units, four bulk terminals and 25 ready mix
concrete plants enjoys pan India presence. Further, with its capacity of 4, 75,000
TPA, Grasim is the largest producer of white cement in India.

The cement industry clocked an outstanding performance in FY’07 with rise in

realizations buoyed by the demand supply mismatch. Grasim’s cement division
recorded a growth of 43% YoY, riding on growth in realizations by 40% and volume
growth of about 4%. As a result of this strong growth, cement division’s share in
gross sales increased substantially in FY’07 to 60% from 55% in FY’06. The turnover
of the White Cement segment also rose by 30%. Overall PBILDT for the cement
division doubled from previous year’s levels, with PBILDT margins going up from
23% in FY’06 to 33% for FY’07.

The company is further ramping up its capacities by an additional 10.3 mtpa

through Greenfield and Brownfield expansions at Shambhupura and Kotputli in
Rajasthan, slated to be commissioned by the end of FY ’08 and first quarter of FY
’09, respectively. Company has planned to support both these plants by captive
thermal power plants. It has also planned to commission its grinding unit at Dadri in
Uttar Pradesh in FY ’08. The total capital outlay for the expansion and modernization
projects, including the captive power plants, is expected to be about Rs.4, 085 crore
(net of capex spent in FY’07). Capacity of UltraTech Cement Ltd. (subsidiary of
Grasim) is also slated to increase by 4.9 mtpa by FY ’09 by a Brownfield expansion.
Further, grinding capacity at Gujarat is being augmented by 2 mtpa. Total capital
outlay for these expansions and modernizations is expected to be about Rs.3, 340
crore (net of capex spent in FY’07). These initiatives will take the group’s overall
capacity to around 48 mtpa.

Other factors in the operations of Grasim Industries Ltd are VSF, Sponge iron,
Textiles and Chemicals.

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 Credit Agencies and Their Impact on Cement Industry

12.Conclusion
The following are factors, along with their analytical implications, considered by
CARE while arriving at the rating of the players that operate in the cement industry.

Location of plants:
While analyzing cement companies, CARE examines the proximity of cement plants
to the raw material source/ end user market. Also companies having either split
location plants or plants spread across geography especially in cement deficit states
are viewed favorably by CARE.

Operating Efficiency:
CARE favorably views companies having own captive power plants operating on low
cost and easily available fuels or manufacturing units set up in low power tariff
states. Also companies which judiciously use the fuels to lower costs and thereby
enhance profitability are also given due credit in the rating process.

Freight:
CARE analyses the transport mode used by companies for dispatching cement and
favorably views companies using a judicious mix of the same to reduce freight cost.

Raw Material (RM):

CARE favorably views companies having cement plants near limestone reserves
with long term mining rights and studies the ability and track record of the company
to source other RMs from open market at comparatively lower price

Regional demand- supply dynamics:

Cement companies catering to a particular region may face concentration risk due
to decline in cement demand in that region resulting in low capacity utilization and
hence CARE favorably views companies having multi-location plants with pan India
presence.

Capacity Expansion:
While examining expansion plans CARE forecasts the regional demand- supply
situation at time of project completion and analyses its impact on company’s
financials and future cash flows. In case of inorganic growth, CARE analyses the cost
of acquisition vis-à-vis benefits of synergies.

Branding:
While rating, CARE analyses selling and distribution expenses and favorably views
companies which are investing in brand promotion. Also, company with an already
established brand commanding a price premium over its peers is also viewed
favorably

Government Intervention:
CARE opines that companies with better operating efficiency, wide market access
and experienced management are at an advantageous position to deal with such
situations.
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