Fitch Ratings has today upgraded the National Long-term Issuer rating of India's Associated Cement Companies Limited (ACC) to 'AAA(ind)' from 'AA+(ind)'. Fitch has also upgraded the rating on its INR1000 million non convertible debenture issue to 'AAA(ind)' from 'AA+(ind)'. The Outlook is Stable. Fitch has also assigned a rating of 'AAA(ind)' to its INR1,500m cash credit facility, a rating of 'F1+(ind)' to its INR5000m letter of credit, and an 'AAA(ind)'/ 'F1+(ind)' rating to its INR2250m bank guarantee limits (fungible between long and short-term).

The ratings upgrades factor in increased integration with Holcim Ltd. ('BBB+'/'F2'/Stable). Holcim exercises management control over ACC through its 78% stake in Ambuja Cement India Private Limited, which in turn holds a 42.7% stake in ACC with another 0.3% being held through Holderind Investments Limited. The upgrade also reflects Fitch's expectation that Holcim will eventually be a majority stakeholder in the company, in line with its global strategy of achieving majority stakes in its strategic acquisitions.

The upgrades also reflect the continued improvement in ACC's operating performance and its improved credit metrics on the back of strong positive free cash flows over FY06 and FY07. Fitch expects ACC to remain a negative net debt company over the medium term, despite its ongoing strong capacity additions of around 10 million MT over FY07-FY10 (of which 2m MT has been completed in FY07), as well as an expected softening of EBITDA margins over the medium term. The company's future cash flow growth will be supported by the phased addition of the planned capex, although free cash flows may turn marginally negative due to the size of the ongoing capex programme. Fitch estimates the total investments in these capacities to be around INR45 billion-INR50bn over FY08-FY11, although the impact is expected to be more than offset by the growth in EBITDA and cash flows from the additional volumes. Any additional large capex/investment, combined with a drop in margins (either due to market conditions or cost pressures) taking net debt/EBITDA beyond 0.75x could act as a potential negative trigger for the rating.

Fitch anticipates EBITDA margins to moderate over the medium term, on the back of the expected softening of cement prices due to the substantial new capex being implemented across the industry. EBITDA margins are also likely to be impacted by an anticipated increase in costs, including on freight and coal. Fitch believes that ACC has limited ability to improve costs and effective cement yields as its blending ratio and use of captive power are already high compared to industry peers, leaving limited scope for improvement. However, margins over the next 12-18 months are likely to remain at current levels.

ACC's sales volumes grew 6.1% in FY07 to 19.97m MT, which, along with the higher prices during the year, resulted in a net sales growth of 20.7% to INR70,674m in FY07. However, margins have marginally declined due to cost pressures. ACC reported an EBITDA margin of 27.3% in FY07 (2006: 28.3%) with a corresponding net margin of 20.2% (2006: 21.2%). In addition to increased operating costs, the company also incurred one-time costs due to its SAP implementation and plant shut-down. ACC accrued positive free cash flows of over INR3bn, and liquid balances of around INR15bn for FY07. The company has used these cash flows to reduce debt over the previous year, with total debt reducing from INR7.8bn in FY06 to INR3.1bn in FY07. ACC's debt protection measures remained strong with negative net debt, and Total Adjusted Debt Net of cash/Op. EBDITAR of -0.6x in FY07. 

Sourced From: Sampark Public Relations Pvt Ltd