CCI order not to impact cement companies' credit profiles

The penalty imposed recently by the Competition Commission of India on 11 cement companies is unlikely to impact the credit quality the four Crisil-rated companies, ratings agency Crisil said in a new report (See: Competition panel imposes Rs6,300-crore fine on 11 cement companies).

According to Crisil, the financial risk profiles of these cement manufacturers are strong enough to offset the impact of the penalty.

The penalty is sizeable at 75 per cent of the aggregate net profits of the four rated cement players for 2011-12.

Crisil, however, said robust liquidity and low gearing will cushion the credit risk profiles of these companies against the impact of the penalty. Moreover, cash
outflows on account of the order are unlikely immediately, given that the manufacturers may appeal against it at the Competition Appellate Tribunal.

The credit risk profiles of these companies are, therefore, expected to remain unchanged in the near term. Adverse changes in the cement players' pricing
ability or operating environment in the wake of the order, will, nevertheless, constitute a rating sensitivity factor over the medium to long term, it said.

Of the Rs6,300-crore fine on the 11 cement companies, the penalty on the four Crisil-rated players - ACC Ltd, Ambuja Cements Ltd, Lafarge India Pvt Ltd, and UltraTech Cement Ltd (see ratings at the bottom) - is Rs3,970 crore.

These companies collectively account for around a third of India's aggregate cement capacity. CCI has found these four entities, and seven other cement companies,  to have violated provisions of the Competition Act, 2002, which deals with anti-competitive agreements including cartels.

The four Crisil-rated companies have robust financial risk profiles, underpinned by strong liquidity (aggregating Rs100 billion as on date) and low gearing (of less than 0.5 times).

Therefore, even if the penalty were to be funded by debt, the players will still maintain comfortable financial risk profiles.

Crisil said it would continue to monitor the impact, if any, of the order on the cement industry's operating environment, especially pricing ability. Any negative impact on the overall pricing environment may affect the industry's operating profitability, and therefore, its business risk profile over the medium to long term.

The CRISIL-rated entities and their ratings

Rated compnies Ratings
ACC Ltd CRISIL AAA/Stable/CRISIL A1+
Ambuja Cements Ltd CRISIL AAA/Stable/CRISIL A1+
Lafarge India Pvt Ltd CRISIL AAA/Stable/CRISIL A1+
UltraTech Cement Ltd CRISIL AAA/Stable/CRISIL A1+

Yesterday another ratings agency, Fitch Ratings, had forecast that CCI's action may aid the process of further consolidation in the industry over the long term. The top eight cement manufacturers in India account for 57 per cent of the manufacturing capacity, while the he rest of the industry is highly fragmented, comprising small- to medium-sized companies mostly with uneconomical size of operations (See: CCI's order may aid further consolidation in cement industry: Fitch).