Fitch downgrades Binani Cement’s outlook to negative

Fitch downgrades Binani Cement’s outlook to negative
Published: 24 November 2010

Fitch Ratings has today revised the outlook on India’s Binani Cement (BCL) National Long-term rating to negative from stable, and simultaneously affirmed the rating at ’A(ind)’. The agency has also affirmed the ratings on BCL`s instruments, as follows:

- INR11,948.8m long-term loans (enhanced from INR9448.8m): ’A(ind)’;

- INR600m cash credit limits: ’A(ind)’; and

- INR2510m non-fund based working capital limits: ’F1(ind)’.

The outlook revision reflects increased risks stemming from the challenging economic environment in the domestic cement sector and continuing deterioration in the performance of BCL’s Dubai operations. A combination of these factors affects the BCL’s profitability and could result in the company`s financial leverage inconsistent with its current ratings.

BCL’s sales performance during H111 (end-September 2010) was severely affected by the correction in cement prices – a reflection of the less-than-expected growth in demand and overcapacity in the industry. BCL’s margins were impacted by higher input costs, primarily of coal, and higher freight expenses.

Fitch notes that the company’s profitability could come under further pressure, if the cement prices do not recover sustainably from Q3FY11 onwards, following the monsoon. Although prices have started to increase from September 2010, the expected increase in new capacity across the sector during FY11 and FY12 is likely to be higher than the growth in demand for cement, resulting in lower prices. Any increase in input costs, such as coal, could also pressurise BCL’s margins.

BCL proposes to generate power for captive use at INR4210m, which will be funded through equity and debt (3:2).

Fitch notes that the additional borrowings could affect the company’s credit metrics and put downward pressure on its ratings.

 Negative rating triggers include any further deterioration at BCL’s Dubai operations or Indian operations, which would result in the company’s EBITDA margins to decline to 15 per cent on a sustained basis. Any additional borrowing, which would result in BCL’s net debt/EBITDA of beyond 4x on a sustained basis, could also act as a negative rating trigger.

In H111, BCL’s India operations reported revenues of INR7776m (H110: INR9568m) with EBITDA margins of 17 per cent (H110: 34 per cent).