While the impacted companies are considering approaching Competition Appellate Tribunal against the order, in the event the fine is imposed, the amount of penalty to be paid by the companies as a % of their year-end (FY12) EBITDA is significant and ranges between 5% to 64%. The impact on credit profiles of most of these entities is likely to be minimal given their relatively low financial leverage (net debt/EBITA), except for Century Textiles and Industries Limited and Jai Prakash Associates). For Fitch-rated entities - ACC Limited (ACC, ‘Fitch AAA(ind)’/Stable) and Ambuja Cements Limited (ACL, ‘Fitch AAA(ind)’/Stable), additional penalty despite being significant in relation to 2011 EBITDA (60% for ACC and 61% for ACL) is unlikely to result in breach of the negative guidelines, given their low financial leverage (total adjusted debt net of cash/EBITDA) and significantly high total cash and cash equivalents (end-December 2011: INR29,530.2m for ACC, INR28,425.1m for ACL).
Fitch has maintained a negative outlook on the Indian cement industry for the last two years. The industry has been struggling with excess capacity (given the existing muted demand scenario) besides having a structural feature of relatively high operating leverage. The top five companies (Ultratech Cement Limited, ACL, ACC, ICL and Madras Cements Limited, constituting around 50% of the industry capacity) enjoy a better cost structure, driven by higher level of vertical integration and locational advantage with respect to sourcing of raw materials and market access. Most other players because of lack of one or more of these factors have a weaker cost structure and moderately high leverage levels (an industry median value of around 4x). Globally, most markets have significant consolidation and this move by CCI may indirectly help the Indian cement industry in correcting this structural imbalance.