SUBMITTED BY:

TWINKLE SINGH 2014D33

VANSHIKA GUPTA 2014D34

NIKITA RASTOGI 2014D39

Credit Analysis Report

CEMENT INDUSTRY INTRODUCTION India's cement industry is a vital part of its economy, providing employment to more than a million

people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has

attracted huge investments, from both Indian and foreign investors, making it the second largest in the

world. The industry is currently in a turnaround phase, trying to achieve global standards in production,

safety and energy efficiency. India has a lot of potential for development in the infrastructure and

construction sector and the cement sector is expected to largely benefit from it. Some of the recent

major government initiatives such as development of 100 smart cities are expected to provide a major

boost to the sector.

MARKET SIZE

The cement market in India is expected to grow at a compound annual growth rate (CAGR) of 8.96

percent during the period 2015-2019. The top 20 cement companies account for almost 70 per cent of

the total cement production of the country. In India, the housing sector is the biggest demand driver of

cement, accounting for about 67 per cent of the total consumption. The other major consumers of

cement include infrastructure at 13 percent, commercial construction at 11 percent and industrial

construction at nine percent.

To meet the rise in demand, cement companies are expected to add 56 million tonnes (MT) capacity

over the next three years. The cement capacity in India may register a growth of eight percent by next

year end to 395 MT from the current level of 366 MT. It may increase further to 421 MT by the end of

2017. While infrastructure is expected to lead the growth, the residential segment will continue as the

largest consumer, constituting 42 - 45% of total demand. The country's per capita consumption stands

at around 190 kg. A total of 188 large cement plants together account for 97 per cent of the total

installed capacity in the country, while 365 small plants account for the rest. Of these large cement

plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu. The Indian cement

industry is dominated by a few companies.

INDUSTRY OUTLOOK

The sector is all set to enter a cyclical upturn, with a macro-led demand recovery, further

complemented by improved demand-supply dynamics led by slowdown in the pace of capacity

additions. A volume growth of 6/8.5/9% over FY16/17/18e, driven by renewed government thrust on

big-ticket infrastructure projects, affordable cost housing and urban development initiatives.

Cement demand to surge on the back of an economic recovery

The argument of soft base and pent-up demand has remained elusive over the past five years, hit by a

lack of infrastructure construction push. FY17 could be the first year of over 8% demand growth as steps

taken by the current National Democratic Alliance (NDA) government would start to fructify, with the

construction sector beginning to see the effects of economic ripples.

Cost pressure to ease off, to aid profitability alongside better realization

Cement manufacturers have reported a sharp jump in their operating cost over the past decade. Freight

costs have been hit by rising diesel prices, impacting road freight, and persistent hikes in railway freight

rates. Raw material costs have been impacted by higher gypsum and fly-ash, while rising energy prices

(coal prices), including impact from reduction in linkage coal and INR depreciation, affected fuel costs.

While cost inflation trends have already tapered off in the past couple of years, it is further expected to

moderate to approx. 3% CAGR during FY15-18 from 8-9% over FY05-14, driven by moderation in fuel

costs and several cost savings initiatives by companies, even as impact from the rise in freight and raw

material costs might continue to shore up outlays.

Abatement of Cost Pressures While cost inflation trends have already moderated in the past couple of years, cost inflation is expected

to moderate to ~3% CAGR during FY15-18 from 8-9% over FY05- 14, largely driven by moderation in fuel

costs, even as impact from the rise in freight and raw material costs might continue to shore up outlays.

To boost profitability, amid a subdued demand environment, cement players have been trying to adopt

several cost savings initiatives including building efficiency on the power consumption front; adopting

varying fuel mix, depending on respective costs; and changing market mix, impacting lead distances to

maximize price benefits.

PRISM CEMENT: COMPANY PROFILE Prism Cement Limited is one of India’s

leading integrated Building Materials’

Company, with a wide range of products

from cement, ready-mixed concrete, tiles, bath products and kitchens. The company has three

divisions, viz. Prism Cement, H & R Johnson (India), and RMC Readymix (India). Prism Cement

Limited also has a 74% stake in Raheja QBE General Insurance Company Limited, a JV with QBE

Group of Australia.

Prism Cement Prism Cement commenced production at its Unit I (Varanasi, UP) in August, 1997 and Unit II (Satna, MP)

in December, 2010. It manufactures Portland Pozzolana Cement (PPC) with the brand name 'Champion'

and premium quality grade of cement under ‘HI-TECH’ and ‘DURATECH’ brand. It caters mainly to

markets of Eastern UP, MP and Bihar, with an average lead distance of 399 kms for cement from its

plant at Satna, MP. It has a wide marketing network with about 3,800 dealers serviced from ~90

stocking points.

H & R Johnson (India)

Established in 1958, H & R Johnson (India) is the pioneer of ceramic tiles in India. For over five decades,

HRJ has added various product categories to offer complete solutions to its customers. Today, HRJ

enjoys the reputation of being the only entity in India to offer end-to-end solutions of Tiles,

Sanitaryware, Bath Fittings, Kitchens, and Engineered Marble & Quartz. All the products are sold under

3 strong brands, viz. Johnson, Johnson Marbonite, and Johnson Endura. In ceramic / vitrified tiles, HRJ

along with its Joint Ventures and subsidiaries has a capacity of over 54.5 million m2 per annum spread

across 9 manufacturing plants across the country.

HR Johnson also has a retail chain named “House of Johnson”, housing and selling the complete range

of products. There are 28 such stores across the country.

RMC Readymix (India)

RMC Readymix (India) is one of India’s leading ready-mixed concrete manufacturers, set-up in 1996.

RMC currently operates 79 ready-mixed concrete plants in 35 cities/towns across the Country. Further,

the Division has been able to secure new positions in its existing markets which will help it to maintain

its growth. RMC has also ventured into the Aggregates business and operates large Quarries and

Crushers. At present, RMC has 7 Quarries across the country. RMC has been at the forefront in setting

high standards for plant and machinery, production and quality systems and product services in the

ready-mixed concrete industry.

The Revenue and EBITDA splits among the various divisions for FY2015 are shown in the charts below .

Total sales and total EBITDA equal INR 6117crore and INR 335 crore respectively.

Fig: Sales breakup Fig: EBITDA breakup

RMC Readymix is the second largest player in India, with a total of 81 plants spanning 35 cities in the

country. Readymix is a growing segment in the infrastructure industry and it is evident by the 2003-12

CAGR of 39% in the segment.

RATING HISTORY

Dec 31, 2008

•ICRA assigned LAA-/A1+ to bank lines of Prism Cement Limited

June 10, 2009

•LAA-/A1+ ratings re-affirmed by ICRA

August 20, 2009

•ICRA placed Prism Cement ratings on a negative watch

July 21, 2010

•LAA-/A1+ rating reaffirmed by ICRA for bank facilities, stable outlook assigned

August 11, 2014

•LAA- rating assigned to NCD programme of Prism Cement Ltd along with stable outlook

Sept 15, 2010

•ICRA reaffirmed previous ratings

Jan 14, 2011

•ICRA assigned LAA-/A1+ ratings to enhanced bank facilities of Prism Cement

•Stable outlook assigned

April 28, 2011

•Previous ratings reaffirmed by ICRA

June 22, 2011

•LAA- rating assigned to NCD programme along with a stable outlook

July 14, 2011

•AA- rating assigned to NCD programme

Dec 21, 2011

•Previous ratings reaffirmed

•Long term outlook rating revised to negative

June 6, 2012

•Ratings revised to A+ for bank loans and A1 for NCD programme of Prism Cement

Oct 16, 2012

•Long term rating revised to A(stable)

•Short term rating reaffirmed at A1

July 31, 2013

•Ratings revised to A- and A2 for bank loans and NCD programme respectively

Sept 11, 2013

•Previous ratings reaffirmed

Aug 25, 2014

•Long term rating reaffirmed

•Short term rating upgraded to A2+

•Long term outlook revised to stable

Sept 30, 2014

•Short term rating of A1 assigned to CP program me

•Long term rating of A-

•Short term arting upgraded to A1

Nov 27, 2014

•Rating of A- assigned to NCD programme of Prism Cement

Jan 20, 2015

•Rating of A- assigned to NCD programme of Prism Cements

SHAREHOLDING PATTERN The company has a market cap of INR 5099 crores. The following chart shows the shareholding pattern

of the company with a large chunk ~75% of the shares being held by the promoters of the company. Of

the 75% shares held by the promoters, the largest percentage is held by Manali Investments, followed

by Hathaway Investments.

The public category holdings that hold over 1% of the total shares are listed in the table below.

Shareholder % of shares held

HDFC Trustee Company Ltd-HDFC Equity Fund

2.7%

Goldman Sachs India Fund Ltd. 1.7%

ICICI Prudential Discovery Fund 1.4%

Morgan Stanley Asia (Singapore) PTE 1.4%

National Westminster Bank Plc. 1.2%

BUSINESS PROFILE/RISKS The cement industry is a giant in the Indian context only waiting to grow and expand with the expansion

and spur of growth in the infrastructure. Prism Cement unlike its competitors is not a nationwide

company and is more focused on servicing the Tier 2 and tier 3 cities. It is strategically located in Satna,

Madhya Pradesh and therefore is a big supplier in MP, Bihar and Uttar Pradesh. The Central

Governments initiative towards development and ownership of houses is an Indian dream and is being

addressed by theses cement companies who will expand to ensure regular supply to meet the expected

surge in demand.

DIVISIONS

CEMENT

Prism Cement based in Satna Madhya Pradesh has a capacity of 5.6 MTPA of cement. It manufactures

Portland Pozzolona Cement (PPC) with the brand name ‘Champion’, ‘High Tech’ and Ordinary Portland

Cement (OPC). The majority of the revenue (97%) is from the PPC business. It has a 3800 strong dealer

network serviced from around 90 stocking points and well spread across UP, MP, Bihar and

Chhattisgarh. The trade channel accounts for 81% of the revenue reflecting the strength of dealer

network. The Company also plans to set up a Greenfield plant in Andhra Pradesh for which mine

development activities are ongoing.

H&R JOHNSON

H&R Johnson operates in the TBK (tiles, bath and kitchen) segment. It is the pioneer of ceramic tiles in

India and was established in 1958. It has 9 manufacturing tile plants across India and a wide distribution

network of over 1000 dealers, 49 branches and 28 Johnson showrooms. Johnson Kitchen range has a

versatile product offering including German as well as Indian modular kitchens.

RMC READYMIX

It is one of the leading ready mixed concrete manufacturer in India over 7 million in capacity. It has 81

manufacturing units spread across 35 cities in India. RMC division has also done backward integration

acquiring some of the quarries. This gives the division a strong competitive advantage in the market due

to regular supply of raw materials.

Economic Risks Changes in macroeconomic factors such as changing interest rates, GDP growth rate and effect of Forex

can affect the company’s performance negatively. To counter such risks, Prism cements has been

keeping a close watch on all such factors and revising their strategies so as to cause the minimum

possible loss to the company.

Credit Risk Delay in payments from clients may result in a cash crunch, thus adding to the working capital. To

counter this, the company has kept a balanced clientele of both retail and institutional customers thus

reducing the risk of longer working capital cycle and debtors.

Political Factors

Infrastructure growth, to a large extend depends on the government spending and regulations.

To safeguard itself from these risk factors, Prism cements focuses on its diverse range of

products and across states, so there is a lesser chance of concentration risk. Also, the company caters to

the housing segment, which de-risks the business model.

Cost Factor The profitability of the company can get affected by the rising costs of raw material, fuel and power.

Various methods are being used by the company to reduce such costs by means of setting up facilities

such as coal gasifiers.

FINANCIAL ANALYSIS Currently the company has a total debt of INR 22362 Mn, and its Debt/Capital Ratio stands at 66.8%.

The company has cash and cash equivalents of INR 1760 Mn currently which has shown an increasing

trend from 2013 onwards. The company has issued bonds as well as has taken up loans which are

mostly secured in order to service its capital requirements.

RATIOS The ratios under consideration are Cash ratios, Current ratios and Quick ratios. From the graphs below we can observe that the cash ratio

has shown a declining trend while the current and the quick

ratios tend to move in the positive direction. This is because

the total current assets of the company have increased

over the past five years, but increase in the inventories

forms a major portion of the current assets indicating that

the company has a longer cash conversion cycle. 0.75

0.8

0.85

0.9

0.95

1

1.05

1.1

2011 2012 2013 2014 2015

Current ratio

Current ratio

The inventory has increased by almost 66% from 2011 till date.

Cash accruals in the form of accounts and notes receivable have risen 1.15 times from 2011 till date.

Current liabilities have almost remained constant in the past three years.

Profitability Ratios

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

2011 2012 2013 2014 2015

Cash Ratio

Cash Ratio

0.31

0.32

0.33

0.34

0.35

0.36

0.37

0.38

0.39

0.4

0.41

2011 2012 2013 2014 2015

Quick Ratio

Quick Ratio

-2

0

2

4

6

8

10

2011 2012 2013 2014 2015

Opearting margin

-2

-1

0

1

2

3

4

2011 2012 2013 2014 2015

Net Income Margin

0

1

2

3

4

5

6

7

8

2011 2012 2013 2014 2015

Return on Capital Employed

-3

-2

-1

0

1

2

3

4

2011 2012 2013 2014 2015

Return on Assets

The company has been reporting a loss in its income statement for the years 2012 to, due to a surge in

operating expenses. However, in the current year, the company reported a profit of mn INR, showing

that the company is putting efforts to get things back on track.

The cash flow from operations continues to remain negative as in the year 2014, due to changes in non

cash capital. Also the company reported an increase in interest expense (due to increase in long term

loans) and foreign exchange and non operating losses for the current year.

The current debt structure of the company constitutes only 26% as short term debt and the

balance73.2% as long term debt.

Leverage Ratios

The company seems to be highly leveraged, with debt forming almost 67% of its total capital, of which a

major chunk is long term liabilities.

The Interest coverage ratio after dipping for two years due to the high loss the company made in 2013

and 2014 is on a rise, indicating that the company is striving to generate enough cash to pay off its debt

obligations in the future.

The average cost of debt stands at 11% as of now, and the company is replacing expensive bank

borrowings with NCDs in a phased manner.

FUTURE PLANS The company plans to come up with a Green field plant in Kurnool district, Andhra Pradesh,with a

cement capacity of 4.8MTPA. The company has already acquired ~3000 acres of land for the same

and the mine development activities are in progress

Rs 1 bn out of a total capital expenditure of Rs 15 bn at the Kurnool plant has been spent on buying

of land and for the required clearances.

The company plans to expand its tiles manufacturing unit in Dewas, MP and an expected investment

of Rs 400 crore will be used for the expansion

0

10

20

30

40

50

60

70

80

2011 2012 2013 2014 2015

Total Debt/ Total Capital

0

0.5

1

1.5

2

2.5

2011 2012 2013 2014 2015

Interst coverage ratio

CORPORATE GOVERNANCE Composition of Board of Directors

As in March 2015, the strength of the BOD is eight directors comprising three executive Directors

and five Non Executive Directors of which three are independent. The Chairman of the board s Non

Executive and Non Independent Director.

None of the Directors on the board is a member on more than ten committees and chairman of

more than five committees across all public companies in which they are Directors.

None of the Directors serve as an Independent Director in more than seven listed companies.

Internal Control

The Company’s internal control systems commensurate with the nature of business and the size and

complexity of operations. The systems are designed to maintain strict accounting control, optimum

efficiency in operations and utilization of resources as well as financial reporting and compliance with

laws rules and regulations.

The Audit Committee reviews the financial reporting process and monitors the implementation

of audit recommendations including compliance with accounting standards and all legal matters

relating to financial accounting. The Committee is headed by an Non Executive independent

Director who ensures transparency.

Independent Directors conduct a meeting to discuss the performance of Non Independent

Directors and evaluate the quality, quantity and timeliness of fow of information between the

Management and the Board.

The company also has an Audit Committee comprising of 6 members both independent and

non independent Directors. The Nomination and Remuneration Committee comprises 4

members followed by Securities Allotment and Transfer Committee, CSR Committee and Risk

Management Committee.

The Company has adopted CSR initiatives in water and health sanitation, Energy conservation,

pollution free atmosphere, clean technologies and primary healthcare of villagers in the vicinity

of the plants.

RECOMMENDATIONS The main conclusions drawn from our analysis are:

Cement industry is cyclical in nature.

Prism Cement has a no significant market share in India, with presence only in 3 states.

The company has shown marginal profits this year, after reporting losses for 3 consecutive years.

The credit rating history of the company shows that its ratings have fluctuated over the years,

ranging from A1+ in 2008 to A- in 2015.

Keeping all the above facts in mind, we would recommend to invest only a small percentage of our

portfolio (2%-3%) in bonds issued by Prism Cement at a rate which is nearby to the average cost of debt

for the company (11% ).