India-based cement producer Prism Cement Ltd is expected to see an improvement in credit metrics from FY15 on the back of an overall improvement in operating efficiency and an absence of any debt-led capex, according to a recent note by India Ratings. It has assigned Prism Cement Limited (PCL) a Long-Term Issuer Rating of 'IND A-'. The Outlook is Stable.

The research house notes that the sharp deterioration in PCL's financial profile in FY13 was largely driven by the breakdown of a silo at unit II (in Satna) in March 2012.  The resulting lower production and higher variable costs caused the cement division to report a low EBITDA. The company had an EBIDTA of INR339/t of cement in FY13 compared with industry average of INR500-INR550/t in central India.

"The operationalisation of the silo would enable PCL to address its issues of low capacity use and high operational costs, which will lead to improvements in EBITDA per tonne," according to India Ratings's expectations. The margins could be incrementally benefitted from the use of petcoke and coal from its captive coal mines (once they are operational), it adds. Some of the benefits are likely to be observed in 2HFY14.

Demand risks in central India
India Ratings highlights that central India (PCL's main market) is facing a demand-supply imbalance due to additional capacities by new entrants. However, this is likely to ease out over the medium term as no further major capacity additions are likely in the central region. Despite the anticipated over supply, operational improvements would enable PCL to earn higher EBITDA per tonne.    

RecurringCapex
PCL's total capex requirements would be around INR1.2bn/year over the next four years, mainly normal recurring capex, which will be funded through a mix of debt and internal accruals. PCL does not intend to incur additional capital expenditure on its greenfield cement plant at Andhra Pradesh in the medium term and thus India Ratings has not considered it for the ratings. However, PCL has already acquired land and mines for this project and all clearances are in place. It has already incurred around INR1.0bn on this project.