Fitch Ratings-Mumbai/Singapore-05 June 2009: Fitch Ratings has today assigned India-based Adhunik Cement Limited (ACL) a National Long-term rating of 'BB-(ind)'. The agency has also assigned ACL's sanctioned long term project bank loans, aggregating INR4,060m, a rating of 'BB-(ind)'. The Outlook for the National Long-term rating is Stable.
The ratings benefit from the advanced stage of completion of a cement plant project which mitigates the risk of cost and time overruns, and reflect the various subsidy benefits available to cement producers in the northeast region and the premium realisations that local producers enjoy over mainland players. A significant amount of completion risk is already mitigated, as land is in the company's possession, financial closure has been achieved, execution contracts are in place and promoters' equity contributions have already been brought in.
Fitch notes that ACL will become one of the largest local cement producers in the fragmented northeast market once the new plant is operative and will be able to benefit from economies of scale and capital and tax and transport subsidies available for five-to-ten years, but it will still have to contend with expected oversupply that will likely be driven by new capacities coming on stream in the region. Another factor that benefits the rating is the well spread out debt repayment schedule which should keep credit metrics comfortable once cement production commences.
Rating constraints include the fact that the project sponsors do not have a proven track record in running a cement plant, and the expected reduction in realisation premiums enjoyed by local producers over mainland producers. Even if the project is completed on schedule, there is some degree of risk of delays in stabilization of the plant, which could be accentuated by its geographic location. Sufficient availability of coal and fly ash in the region remains a concern but the company has entered into Memorandums of Understanding with fly ash, coal and power suppliers to ensure raw material availability. This should reduce the time taken for stabilization of the plant and for it to be run at optimum utilization levels.
ACL, part of the Kolkota based Adhunik group, along with the MSP group, has interests in steel and mining, and is setting up an integrated cement plant with a capacity of 1.5 mtpa along with a 25MW captive power plant in the northeastern state of Meghalaya, to be built and operated by ACL. The estimated project cost is INR6,140m, which will be financed by a debt-equity mix of 2:1. The construction of the plant started in June 2007 and the project is on target to commence cement production from October 2009.
Fitch believes that the timely completion and stabilization of the project in addition to a good operating performance could act as positive triggers for the rating, whereas any delays in project completion or stabilization which postpone revenue generation could qualify as potential negative triggers.
The project documents incorporate a number of standard clauses showing that debt repayments will start from FY11, putting some stress on debt coverage in that year. Although the forecasted cash flows provide only moderate levels of coverage to lenders and are dependent to a large extent on the cement cycle, ACL should be reasonably able to withstand some stress primarily due to subsidy and realisation premium benefits. Currently, the civil engineering and infrastructure work at the site is at advanced stages of completion.
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