Care Rating
Rating Rationale
The above ratings continue to draw strength from promoters’ experience & group support, established brand, coal linkage for
majority of its requirement, highly comfortable leverage position & liquidity situation, satisfactory profitability levels & margins
in FY10 and benefits being derived by the industry by virtue of Government support to the infrastructure sector. The ratings are
however, constrained by the present challenging operating environment for the domestic cement industry emanating from the
planned capacity expansions and rising input & transportation costs affecting the capacity utilization & profitability and risk
associated with the implementation of ongoing projects. The ratings also factor in the deterioration in performance in 9MFY11.
Successful commissioning of the ongoing projects and ability to improve upon profitability & capacity utilisation are the key rating
sensitivities.
Company Background
MCL, incorporated in October, 1976, belongs to Shri B.K. Birla group, a leading industrial group with Kesoram Industries Ltd.
(rated CARE AA/PR1+) being the flagship company. MCL is engaged in manufacturing of cement at its plant in Kota, Rajasthan.
The manufacturing facilities comprise two units with an aggregate capacity of 2 mn. tpa for Pozzolana Portland cement (PPC).
The proportion of PPC and OPC produced generally has been in 60:40 ratio. MCL has backward integration in the form of
captive limestone mines and 35 MW coal based power plant (of which 17.5 MW was commissioned in February 2011). MCL
also has wind mills (capacity - 13.65 MW) at Jaisalmer, Rajasthan, of which 7.5 MW was commissioned in June 2010.
The Board of MCL approved merger of Mangalam Timber Products Ltd. (MTPL), a group company engaged in manufacture of
Medium and High Density Fibre Board with MCL with retrospective effect from Apr.1, 2010. The merger is subject to various
approvals (including the approval of the High Courts of Rajasthan and Orissa). During FY10, MTPL incurred loss of Rs.1.2 crore
on total income of Rs.68.2 crore (as against PAT and total income of Rs.1.5 crore and Rs.71.6 crore respectively in FY09).
MCL has ISO 9001:2008, ISO 14001:2004 and IS 18001:2007 certifications.
Operations
Capacity utilisation declined in FY10 to 82% (97% in FY09) in line with the industry trend despite company achieving highest
ever clinker production. The cement production was affected due to non-availability of railway wagons and also shut down of
Unit-I grinding unit for 38 days for replacement of shell in the cement mill and also for regular maintenance work. Even then,
gross sales increased by about 5% in FY10 over FY09 mainly due to increase in quantity of clinker sold and higher AGSPR of both
cement and clinker. The company fixes the price area-wise, after taking into account the outward transportation cost involved.
Consequently, the AGSPR depends largely on the area-wise sales composition. MCL has a network of dealers, through which it
sells cement under BIRLA UTTAM CEMENT brand, across the markets of Rajasthan, Madhya Pradesh, Haryana, western Uttar
Pradesh, Kota, Delhi, etc. In FY10, MCL had an overall market share of 0.8% in India (based on aggregate despatch of 197.5
million tonnes in FY10) and about 3.7% in North-India (based on aggregate despatch of 44 million tonnes in FY10). Going
forward, capacity utilisation and cement prices are estimated to remain under pressure, despite expectation of demand growth,
owing to significant capacity addition and rising input cost. Ability of MCL to absorb the over-supply and pricing pressure shall be
critical.
Raw material consumption cost accounted for about 20.5% of cost of sales in FY10, as against 17.2% in FY09. This was mainly
due to due to increase in royalty rates of limestone as also due to increase in average procurement price (APP) of most of the raw
materials. Limestone, the major raw material for manufacturing cement, is being sourced from captive leasehold mines.
However, as the limestone of the captive mine is of relatively inferior quality, MCL mixes 15% high grade limestone purchased
locally to make it usable. Further, in view of relatively low grade of limestone, the fly ash blending was relatively lower at 15%.
For fly ash, the company has a long term supply arrangement with Kota Super Thermal Power Station to receive the same, free of
cost.
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Cement manufacturing is highly power intensive with power & fuel cost accounting for about 37% of cost of sales in FY10. The
consumption of power per tonne of cement for unit-I was higher at 95 kwh, as against 81 kwh for unit-II in view of Unit I being
relatively older. MCL has a linkage for about 65% of its coal requirement and the balance 35% is procured from the open
market, at spot price. Although the price of coal increased in FY10, coal consumption per tonne of cement declined for both unit
I & II. Freight cost, one of the critical components for profitability accounted for about 27% of cost of sales in FY10.
Ongoing Project
MCL has deferred the projects comprising clinkerisation unit (1.32 mtpa) & grinding unit (1.70 mtpa) proposed to be set-up at
its existing location at Morak, Rajasthan (project cost - Rs.735.3 crore) due to adverse industry scenario and has embarked on a
relatively smaller sized project which is to be set up, in two phases, [phase I being modification & upgradation of its existing
manufacturing facilities at Morak, Rajasthan, and phase II being setting up 2000 tpd grinding unit at Aligarh, Uttar Pradesh
(U.P.)], at an aggregate cost of Rs.201.1 crore. The project cost is being financed at a debt-equity of 0.99:1 (term loan from
banks Rs.100.0 crore and internal accruals Rs.101.1 crore). The project is at nascent stage of implementation and the financial
closure for the project has not yet been achieved. However, the 17.5 MW CPP has already commenced operations in February,
2011 at a cost of about Rs.75 crore which was entirely funded out of internal accruals.
Financial Performance
Net sales registered about 9% growth in FY10 over FY09, driven by increase in AGSPR of both cement and clinker and also two
fold increase in quantity sold of clinker. PBILDT margin increased during FY10 buoyed by increased realisation and benefits of
economies of scale. This alongwith same level of capital charge led to increase in PAT margin despite 14% decline in nonoperating
income (in view of extra-ordinary income of Rs.13.3 crore in FY09 on prepayment of deferred sales tax loans). GCA
was comfortable vis-a-vis the debt level of the company.
Leverage ratios as on Mar.31, 2010 continued to remain comfortable (even after considering the proposed merger of MTPL with
MCL w.e.f Apr.1, 2010). Current ratio was also comfortable at 1.55 as on Mar.31, 2010.
The performance of the company during the 9MFY11 was relatively weak on account of oversupply in the industry, impact of
monsoon and state wise agitation by the Gujjar community in Rajasthan in the third quarter of FY11 which slowed down the
dispatches. During 9MFY11, MCL earned a PAT (after defd. tax) of Rs.15.3 crore on net sales of Rs.357.3 crore.
Industry outlook
Cement consumption in the country has grown at an average multiplication factor of approximately 1.2 times the GDP growth
rate, in past five years. In terms of value, the industry stood at Rs.1,028 bn in FY10. Despite of economic slowdown in FY09, the
industry has been able to maintain its multiplier factor with the GDP growth at 1.25 times. Post the slow down, the macroeconomic
environment has worked in the favour of the cement industry and the cement consumption growth recorded the
multiplication factor of 1.5 times the GDP growth rate in FY10. Domestic cement consumption registered an impressive double
digit growth of 11% on y-o-y basis in FY10.
Cement industry has witnessed a substantial capacity addition of about 84 mn tonnes in the period FY 08-10. Due to this,
industry’s capacity utilisation rate which showed a rising trend upto FY07 dropped to a level of 81% in FY10. Eventhough, the
utilisation rate dropped, average cement prices in FY10 rose by about 3% on yoy basis.
In the first seven months of FY11, cement demand registered a growth of 8.4% on yoy basis. Overall utilisation rate of the
industry has registered a decline to a level of 74%. Average cement prices witnessed decline across regions barring the Eastern
region.
Industry is expected to register capacity addition of about 65 mn tonnes in the period FY11-12. The operating rate of the industry
is expected to decline to a level 77% in FY12 due to the substantial capacity addition.
Domestic cement demand is expected to grow at a CAGR of about 10.4% and reach a level of 241 mn tonnes by the end of
FY12. Cement demand would largely be driven by the focus of GoI on development of low-cost housing in rural & semi-urban
regions and infrastructure facilities in the country.
Going forward, with the revival of the economy and improvement in the demand from the infrastructure sector, players like
MCL are also expected to reap the benefits.