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ICRA upholds LA-/A1 ratings on Lafarge Aggregates and Concrete India bank facilities.

BANKING AND CREDIT NEWS-10 August 2010-ICRA upholds LA-/A1 ratings on Lafarge Aggregates and Concrete India bank facilities(C)1994-2010 M2 COMMUNICATIONS

10 August 2010 - India's ICRA said it reaffirmed the LA- and A1 ratings on INR6.5bn (USD140.2m/EUR106.5m) bank limits of Lafarge Aggregates and Concrete India Private Ltd (LACIPL).

The company is part of France-based Lafarge group. LACIPL is into manufacturing and selling of ready mix concrete (RMC) and aggregates.

The ratings reflect strengths arising from the company's status as a wholly-owned subsidiary of Lafarge SA (EPA:LG), its leading position in the domestic market for RMC with the acquisition of the RMC business of Larsen & Toubro (L&T) mainly in western and southern regions for RMC with a diversified customer base and currently favourable financial risk profile as reflected in low gearing of 0.56 times as at 31 December 2009.

ICRA further notes that while the current penetration of the RMC in the country is low, especially in non-urban areas, the overall prospects in the long term are favourable given the expected growth in the construction sector and the advantages that RMC offers over onsite mixing of concrete.

The ratings also favourably factor the company's proposed backward integration into the aggregate business which will not only support the RMC business with uninterrupted supply of quality aggregates but could also enhance the overall profitability of the company.

The ratings are, however, constrained by low levels of profitability, which also remains vulnerable to intense competitive pressures - because of low entry barriers given the low-tech and low fixed capital intensive nature of operations - from the select established as well as a large number of unorganised players and also the company's ability to manage adverse fluctuations in the cost of raw materials is important, although the price escalation in cement and fuel is a pass- through in long-term contracts. The company's profitability and capital structure on an adjusted basis is also affected by high cost of acquisition leading to large goodwill and its amortisation. The proposed entry into aggregates is at an initial stage and the economics of the business is yet to be established and this business too is carried out mostly by the unorganised sector currently.

Any significantly debt-funded large capital expenditure and any material change in the credit risk profile of the parent will be key rating sensitivities.

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Publication:M2 Banking & Credit News (BCN)
Date:Aug 10, 2010
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