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Credit Analysis Report

SUBMITTED BY:

TWINKLE SINGH

2014D33

VANSHIKA GUPTA

2014D34

NIKITA RASTOGI

2014D39

CEMENT INDUSTRY
INTRODUCTION
India's cement industry is a vital part of its economy, providing employment to more than a million
people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has
attracted huge investments, from both Indian and foreign investors, making it the second largest in the
world. The industry is currently in a turnaround phase, trying to achieve global standards in production,
safety and energy efficiency. India has a lot of potential for development in the infrastructure and
construction sector and the cement sector is expected to largely benefit from it. Some of the recent
major government initiatives such as development of 100 smart cities are expected to provide a major
boost to the sector.

MARKET SIZE
The cement market in India is expected to grow at a compound annual growth rate (CAGR) of 8.96
percent during the period 2015-2019. The top 20 cement companies account for almost 70 per cent of
the total cement production of the country. In India, the housing sector is the biggest demand driver of
cement, accounting for about 67 per cent of the total consumption. The other major consumers of
cement include infrastructure at 13 percent, commercial construction at 11 percent and industrial
construction at nine percent.
To meet the rise in demand, cement companies are expected to add 56 million tonnes (MT) capacity
over the next three years. The cement capacity in India may register a growth of eight percent by next
year end to 395 MT from the current level of 366 MT. It may increase further to 421 MT by the end of
2017. While infrastructure is expected to lead the growth, the residential segment will continue as the
largest consumer, constituting 42 - 45% of total demand. The country's per capita consumption stands
at around 190 kg. A total of 188 large cement plants together account for 97 per cent of the total
installed capacity in the country, while 365 small plants account for the rest. Of these large cement
plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu. The Indian cement
industry is dominated by a few companies.

INDUSTRY OUTLOOK
The sector is all set to enter a cyclical upturn, with a macro-led demand recovery, further
complemented by improved demand-supply dynamics led by slowdown in the pace of capacity
additions. A volume growth of 6/8.5/9% over FY16/17/18e, driven by renewed government thrust on
big-ticket infrastructure projects, affordable cost housing and urban development initiatives.
Cement demand to surge on the back of an economic recovery
The argument of soft base and pent-up demand has remained elusive over the past five years, hit by a
lack of infrastructure construction push. FY17 could be the first year of over 8% demand growth as steps
taken by the current National Democratic Alliance (NDA) government would start to fructify, with the
construction sector beginning to see the effects of economic ripples.

Cost pressure to ease off, to aid profitability alongside better realization


Cement manufacturers have reported a sharp jump in their operating cost over the past decade. Freight
costs have been hit by rising diesel prices, impacting road freight, and persistent hikes in railway freight
rates. Raw material costs have been impacted by higher gypsum and fly-ash, while rising energy prices
(coal prices), including impact from reduction in linkage coal and INR depreciation, affected fuel costs.
While cost inflation trends have already tapered off in the past couple of years, it is further expected to
moderate to approx. 3% CAGR during FY15-18 from 8-9% over FY05-14, driven by moderation in fuel
costs and several cost savings initiatives by companies, even as impact from the rise in freight and raw
material costs might continue to shore up outlays.

Abatement of Cost Pressures


While cost inflation trends have already moderated in the past couple of years, cost inflation is expected
to moderate to ~3% CAGR during FY15-18 from 8-9% over FY05- 14, largely driven by moderation in fuel
costs, even as impact from the rise in freight and raw material costs might continue to shore up outlays.
To boost profitability, amid a subdued demand environment, cement players have been trying to adopt
several cost savings initiatives including building efficiency on the power consumption front; adopting
varying fuel mix, depending on respective costs; and changing market mix, impacting lead distances to
maximize price benefits.

PRISM CEMENT: COMPANY


PROFILE
Prism Cement Limited is one of Indias
leading integrated Building Materials
Company, with a wide range of products

from cement, ready-mixed concrete, tiles, bath products and kitchens. The company has three
divisions, viz. Prism Cement, H & R Johnson (India), and RMC Readymix (India). Prism Cement
Limited also has a 74% stake in Raheja QBE General Insurance Company Limited, a JV with QBE
Group of Australia.

Prism Cement
Prism Cement commenced production at its Unit I (Varanasi, UP) in August, 1997 and Unit II (Satna, MP)
in December, 2010. It manufactures Portland Pozzolana Cement (PPC) with the brand name 'Champion'
and premium quality grade of cement under HI-TECH and DURATECH brand. It caters mainly to
markets of Eastern UP, MP and Bihar, with an average lead distance of 399 kms for cement from its
plant at Satna, MP. It has a wide marketing network with about 3,800 dealers serviced from ~90
stocking points.

H & R Johnson (India)


Established in 1958, H & R Johnson (India) is the pioneer of ceramic tiles in India. For over five decades,
HRJ has added various product categories to offer complete solutions to its customers. Today, HRJ
enjoys the reputation of being the only entity in India to offer end-to-end solutions of Tiles,
Sanitaryware, Bath Fittings, Kitchens, and Engineered Marble & Quartz. All the products are sold under
3 strong brands, viz. Johnson, Johnson Marbonite, and Johnson Endura. In ceramic / vitrified tiles, HRJ
along with its Joint Ventures and subsidiaries has a capacity of over 54.5 million m2 per annum spread
across 9 manufacturing plants across the country.
HR Johnson also has a retail chain named House of Johnson, housing and selling the complete range
of products. There are 28 such stores across the country.

RMC Readymix (India)


RMC Readymix (India) is one of Indias leading ready-mixed concrete manufacturers, set-up in 1996.
RMC currently operates 79 ready-mixed concrete plants in 35 cities/towns across the Country. Further,
the Division has been able to secure new positions in its existing markets which will help it to maintain
its growth. RMC has also ventured into the Aggregates business and operates large Quarries and
Crushers. At present, RMC has 7 Quarries across the country. RMC has been at the forefront in setting
high standards for plant and machinery, production and quality systems and product services in the
ready-mixed concrete industry.
The Revenue and EBITDA splits among the various divisions for FY2015 are shown in the charts below .
Total sales and total EBITDA equal INR 6117crore and INR 335 crore respectively.

Fig: Sales breakup

Fig: EBITDA breakup

RMC Readymix is the second largest player in India, with a total of 81 plants spanning 35 cities in the
country. Readymix is a growing segment in the infrastructure industry and it is evident by the 2003-12
CAGR of 39% in the segment.

RATING HISTORY

Dec 31, 2008

June 10, 2009

August 20, 2009

ICRA assigned LAA-/A1+ to


bank lines of Prism Cement
Limited

LAA-/A1+ ratings re-affirmed


by ICRA

ICRA placed Prism Cement


ratings on a negative watch

July 21, 2010

August 11, 2014

Sept 15, 2010

LAA-/A1+ rating reaffirmed by


ICRA for bank facilities, stable
outlook assigned

LAA- rating assigned to NCD


programme of Prism Cement
Ltd along with stable outlook

ICRA reaffirmed previous


ratings

Jan 14, 2011

April 28, 2011

June 22, 2011

ICRA assigned LAA-/A1+


ratings to enhanced bank
facilities of Prism Cement
Stable outlook assigned

Previous ratings reaffirmed by


ICRA

LAA- rating assigned to NCD


programme along with a
stable outlook

July 14, 2011

Dec 21, 2011

June 6, 2012

AA- rating assigned to NCD


programme

Previous ratings reaffirmed


Long term outlook rating
revised to negative

Ratings revised to A+ for bank


loans and A1 for NCD
programme of Prism Cement

Oct 16, 2012

July 31, 2013

Sept 11, 2013

Long term rating revised to


A(stable)
Short term rating reaffirmed
at A1

Ratings revised to A- and A2


for bank loans and NCD
programme respectively

Previous ratings reaffirmed

Aug 25, 2014

Sept 30, 2014

Nov 27, 2014

Long term rating reaffirmed


Short term rating upgraded to
A2+
Long term outlook revised to
stable

Short term rating of A1


assigned to CP program me
Long term rating of AShort term arting upgraded to
A1

Rating of A- assigned to NCD


programme of Prism Cement

Jan 20, 2015


Rating of A- assigned to NCD
programme of Prism Cements

SHAREHOLDING PATTERN
The company has a market cap of INR 5099 crores. The following chart shows the shareholding pattern
of the company with a large chunk ~75% of the shares being held by the promoters of the company. Of
the 75% shares held by the promoters, the largest percentage is held by Manali Investments, followed
by Hathaway Investments.

The public category holdings that hold over 1% of the total shares are listed in the table below.

Shareholder
HDFC Trustee Company Ltd-HDFC Equity
Fund
Goldman Sachs India Fund Ltd.
ICICI Prudential Discovery Fund
Morgan Stanley Asia (Singapore) PTE
National Westminster Bank Plc.

% of shares held
2.7%
1.7%
1.4%
1.4%
1.2%

BUSINESS PROFILE/RISKS
The cement industry is a giant in the Indian context only waiting to grow and expand with the expansion
and spur of growth in the infrastructure. Prism Cement unlike its competitors is not a nationwide
company and is more focused on servicing the Tier 2 and tier 3 cities. It is strategically located in Satna,
Madhya Pradesh and therefore is a big supplier in MP, Bihar and Uttar Pradesh. The Central
Governments initiative towards development and ownership of houses is an Indian dream and is being
addressed by theses cement companies who will expand to ensure regular supply to meet the expected
surge in demand.

DIVISIONS
CEMENT
Prism Cement based in Satna Madhya Pradesh has a capacity of 5.6 MTPA of cement. It manufactures
Portland Pozzolona Cement (PPC) with the brand name Champion, High Tech and Ordinary Portland
Cement (OPC). The majority of the revenue (97%) is from the PPC business. It has a 3800 strong dealer
network serviced from around 90 stocking points and well spread across UP, MP, Bihar and
Chhattisgarh. The trade channel accounts for 81% of the revenue reflecting the strength of dealer
network. The Company also plans to set up a Greenfield plant in Andhra Pradesh for which mine
development activities are ongoing.

H&R JOHNSON

H&R Johnson operates in the TBK (tiles, bath and kitchen) segment. It is the pioneer of ceramic tiles in
India and was established in 1958. It has 9 manufacturing tile plants across India and a wide distribution
network of over 1000 dealers, 49 branches and 28 Johnson showrooms. Johnson Kitchen range has a
versatile product offering including German as well as Indian modular kitchens.

RMC READYMIX
It is one of the leading ready mixed concrete manufacturer in India over 7 million in capacity. It has 81
manufacturing units spread across 35 cities in India. RMC division has also done backward integration
acquiring some of the quarries. This gives the division a strong competitive advantage in the market due
to regular supply of raw materials.

Economic Risks
Changes in macroeconomic factors such as changing interest rates, GDP growth rate and effect of Forex
can affect the companys performance negatively. To counter such risks, Prism cements has been
keeping a close watch on all such factors and revising their strategies so as to cause the minimum
possible loss to the company.
Credit Risk
Delay in payments from clients may result in a cash crunch, thus adding to the working capital. To
counter this, the company has kept a balanced clientele of both retail and institutional customers thus
reducing the risk of longer working capital cycle and debtors.
Political Factors

Infrastructure growth, to a large extend depends on the government spending and regulations.
To safeguard itself from these risk factors, Prism cements focuses on its diverse range of
products and across states, so there is a lesser chance of concentration risk. Also, the company caters to
the housing segment, which de-risks the business model.
Cost Factor
The profitability of the company can get affected by the rising costs of raw material, fuel and power.
Various methods are being used by the company to reduce such costs by means of setting up facilities
such as coal gasifiers.

FINANCIAL ANALYSIS
Currently the company has a total debt of INR 22362 Mn, and its Debt/Capital Ratio stands at 66.8%.
The company has cash and cash equivalents of INR 1760 Mn currently which has shown an increasing
trend from 2013 onwards. The company has issued bonds as well as has taken up loans which are
mostly secured in order to service its capital requirements.

RATIOS
The ratios under consideration are Cash ratios, Current
ratios and Quick ratios.
From the graphs below we can observe that the cash ratio
has shown a declining trend while the current and the quick
ratios tend to move in the positive direction. This is because
the total current assets of the company have increased
over the past five years, but increase in the inventories
forms a major portion of the current assets indicating that
the company has a longer cash conversion cycle.

Current ratio
1.1
1.05
1
0.95
Current ratio

0.9
0.85
0.8
0.75
2011

2012

2013

2014

2015

Cash Ratio

Quick Ratio

0.18

0.41

0.16

0.4

0.14

0.39
0.38

0.12

0.37

0.1
Cash Ratio

0.08

Quick Ratio

0.35

0.06

0.34

0.04

0.33

0.02

0.32

0.31
2011

0.36

2012

2013

2014

2015

2011

2012

2013

2014

2015

The inventory has increased by almost 66% from 2011 till date.
Cash accruals in the form of accounts and notes receivable have risen 1.15 times from 2011 till date.
Current liabilities have almost remained constant in the past three years.

Profitability Ratios

Opearting margin

Net Income Margin

10

-1

-2

2011

2012

2013

2014

2015

2011

3
2
1
0

-2
-3

2012

2013

2014

2014

2015

Return on Capital Employed

2011

2013

-2

Return on Assets

-1

2012

2015

8
7
6
5
4
3
2
1
0
2011

2012

2013

2014

2015

The company has been reporting a loss in its income statement for the years 2012 to, due to a surge in
operating expenses. However, in the current year, the company reported a profit of mn INR, showing
that the company is putting efforts to get things back on track.
The cash flow from operations continues to remain negative as in the year 2014, due to changes in non
cash capital. Also the company reported an increase in interest expense (due to increase in long term
loans) and foreign exchange and non operating losses for the current year.
The current debt structure of the company constitutes only 26% as short term debt and the
balance73.2% as long term debt.

Leverage Ratios
Total Debt/ Total Capital

Interst coverage ratio

80
70
60
50
40
30
20
10
0

2.5
2
1.5
1
0.5
0
2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

The company seems to be highly leveraged, with debt forming almost 67% of its total capital, of which a
major chunk is long term liabilities.
The Interest coverage ratio after dipping for two years due to the high loss the company made in 2013
and 2014 is on a rise, indicating that the company is striving to generate enough cash to pay off its debt
obligations in the future.
The average cost of debt stands at 11% as of now, and the company is replacing expensive bank
borrowings with NCDs in a phased manner.

FUTURE PLANS

The company plans to come up with a Green field plant in Kurnool district, Andhra Pradesh,with a
cement capacity of 4.8MTPA. The company has already acquired ~3000 acres of land for the same
and the mine development activities are in progress
Rs 1 bn out of a total capital expenditure of Rs 15 bn at the Kurnool plant has been spent on buying
of land and for the required clearances.
The company plans to expand its tiles manufacturing unit in Dewas, MP and an expected investment
of Rs 400 crore will be used for the expansion

CORPORATE GOVERNANCE
Composition of Board of Directors

As in March 2015, the strength of the BOD is eight directors comprising three executive Directors
and five Non Executive Directors of which three are independent. The Chairman of the board s Non
Executive and Non Independent Director.
None of the Directors on the board is a member on more than ten committees and chairman of
more than five committees across all public companies in which they are Directors.
None of the Directors serve as an Independent Director in more than seven listed companies.

Internal Control
The Companys internal control systems commensurate with the nature of business and the size and
complexity of operations. The systems are designed to maintain strict accounting control, optimum
efficiency in operations and utilization of resources as well as financial reporting and compliance with
laws rules and regulations.

The Audit Committee reviews the financial reporting process and monitors the implementation
of audit recommendations including compliance with accounting standards and all legal matters
relating to financial accounting. The Committee is headed by an Non Executive independent
Director who ensures transparency.

Independent Directors conduct a meeting to discuss the performance of Non Independent


Directors and evaluate the quality, quantity and timeliness of fow of information between the
Management and the Board.

The company also has an Audit Committee comprising of 6 members both independent and
non independent Directors. The Nomination and Remuneration Committee comprises 4
members followed by Securities Allotment and Transfer Committee, CSR Committee and Risk
Management
Committee.

The Company has adopted CSR initiatives in water and health sanitation, Energy conservation,
pollution free atmosphere, clean technologies and primary healthcare of villagers in the vicinity
of the plants.

RECOMMENDATIONS
The main conclusions drawn from our analysis are:
Cement industry is cyclical in nature.
Prism Cement has a no significant market share in India, with presence only in 3 states.
The company has shown marginal profits this year, after reporting losses for 3 consecutive years.
The credit rating history of the company shows that its ratings have fluctuated over the years,
ranging from A1+ in 2008 to A- in 2015.

Keeping all the above facts in mind, we would recommend to invest only a small percentage of our
portfolio (2%-3%) in bonds issued by Prism Cement at a rate which is nearby to the average cost of debt
for the company (11% ).

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