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Dec 8, 2009
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Fitch rates India's Century Textiles short tem debt program

By
Reuters
Published
Dec 8, 2009

(The following was released by the rating agency) Dec 8 (Fitch) - Fitch Ratings has today affirmed India's Century Textiles and Industries Ltd's (CTIL) National Long-term rating at 'AA-(ind)' with a Negative Outlook. Fitch has also assigned a rating of 'F1+(ind)' to the company's proposed INR3bn commercial paper/ short-term debt issuance. The instrument will not be carved out of the fund-based limits.



At the same time, Fitch has affirmed CTIL's bank facilities, as follows:

- Long term debts of INR11.93bn: 'AA-(ind)';

- Fund-based bank limits of INR6.5bn: 'F1+(ind)';

- Non fund-based bank limits of INR5.25bn: 'F1+(ind)';

- Short-term loans of INR2bn: 'F1+(ind)'; and

- CP/short-term debt of INR5.5bn and carved out of the company's fund-based limits: 'F1+(ind)'.

The ratings reflect the company's comfortable earnings and profitability during FY09-H1FY10, supported by the strong performance of its cement business, which has more than offset the margin pressures faced by its paper and textiles business. The cement business benefited from continued strong volume demand, and firm prices during the period.

The paper business over H1FY10 has faced margin pressures due to rising raw material costs and muted demand; Fitch expects high raw material prices to continue to constrain margins over the near term. The company slowed the pace of its paper board and fibre line capacity expansion - a INR12bn project - due to muted demand. However, Fitch expects the paper division margins to improve over the medium term, as the benefits from its capex accrue. These benefits have been factored into the ratings. The textile business has remained largely stable, although the anticipated benefits from the investments undertaken in FY09 are yet to accrue.

The Negative Outlook reflects the scale of company's capex plans of around INR22bn over FY10-FY13, coupled with the margin pressures faced by its paper and textiles businesses, and consequent negative free cash flows. These risks are partly offset by Fitch's expectation of growing earnings. The agency expects that cement earnings would remain comfortable, although at lower levels over the near term due to expected moderation in prices, whilst medium to long-term earnings would be supported by growth in earnings from paper.

CTIL is funding the majority of its capex through short-term loans, although the consequent refinancing risks are partly offset by its long operating history. CTIL also retains the flexibility to stagger its capex which could moderate the pressure on cash flows in the event of any liquidity or margin pressures. Fitch notes that the impact of higher debt to fund the negative free cash flows over the medium-term would be partly offset by the growth in earnings from projects completed in FY09 and FY10.

Negative ratings factors include any further debt-led capex, and any greater than expected pressure on operating margins due to adverse market conditions affecting credit metrics. In any case, a net debt/EBITDA of over 3x on a sustained basis could act as a negative rating factor. Conversely, a continuance of strong profitability and a demonstration of returns from completed projects, coupled with a more staggered capex schedule could result in a revision of the Outlook to Stable.

For FY09, CTIL generated revenues of INR38,157m with cement and paper contributing 55% and 24%, respectively. EBITDA margins were at 16%, with the majority of the EBITDA accounted for by cement. Net debt/EBITDA deteriorated marginally to 2.7x in FY09 (FY08: 2.1x), while interest cover fell to 6.6x from 7.9x. This was due to the INR9bn debt-led capex in FY09, which resulted in negative free cash flows of around INR3.8bn. H1FY10 margins improved to around 24% (H1FY09: 16%), driven by cement, which reported EBITDA margins of over 30% for the period.

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