Sagar Cements Merger with Andhra Cements Puts Loans Under Watch

Rating Action Explained

India Ratings has placed Andhra Cements Limited's (ACL) bank loan facilities, amounting to INR9,869.70 million, under a 'Rating Watch with Developing Implications.' This action stems from ACL's upcoming merger with its parent, Sagar Cements Limited (SCL). The rating agency anticipates the merger process will take an estimated nine to twelve months to finalize, pending necessary regulatory and shareholder approvals. India Ratings is closely monitoring how this consolidation will impact ACL's financial health and SCL's liquidity.

Strategic Rationale

A 'Rating Watch with Developing Implications' means India Ratings is closely monitoring the situation, with the rating potentially moving up, down, or being affirmed once more clarity emerges. The proposed merger is Sagar Cements' strategy to simplify and streamline its group cement business, aiming for lower overhead costs and elimination of duplicate functions. If successful, Andhra Cements will cease to exist as a separate legal entity, and its debt will transfer to Sagar Cements.

Background

Sagar Cements Ltd previously acquired Andhra Cements Ltd in 2017 through the National Company Law Tribunal's (NCLT) insolvency resolution process. India Ratings currently holds a 'Negative' outlook on Sagar Cements Ltd. This reflects potential risks to SCL's liquidity and deleveraging plans if its earnings before interest, taxes, depreciation, and amortization (EBITDA) growth is weaker than expected, largely due to subdued cement pricing.

Merger Impact

• Andhra Cements will be absorbed into Sagar Cements, ending its status as an independent legal entity.
• Andhra Cements' debt instruments will transfer to Sagar Cements.
• The group structure will consolidate, potentially creating operational efficiencies and cost reductions.
• Rating agencies will assess the combined entity's credit profile.

Key Risks

• Approval Hurdles: The merger requires statutory, regulatory, and shareholder approvals, including from the National Company Law Tribunal (NCLT), which could cause delays.
• Liquidity Strain: Both SCL and ACL show stretched liquidity, with average working capital limit utilization around 90% (SCL) and 90% (ACL), leaving little cushion.
• SCL's Financials: SCL's 'Negative' outlook adds risk if market pricing pressures result in lower-than-expected EBITDA, affecting its ability to support the merged entity or deleverage.
• Financial Support: ACL might need ongoing financial support from SCL to meet its obligations until the merger is finalized.

Industry Context

Upon completion, the merged entity's consolidated cement capacity is projected to reach approximately 11.75 million tonnes per annum (MTPA) by FY27. This will position Sagar Cements as a significant player, though smaller than giants like UltraTech Cement (over 130 MTPA) or Shree Cement (over 50 MTPA).

Key Figures

• Andhra Cements' bank loan facilities under review total INR 9,869.70 million (as of Q4 FY26).
• Andhra Cements has a cement capacity of 2.25 million tonnes per annum (FY25).
• Sagar Cements' consolidated capacity was 10.5 million tonnes per annum in FY25, projected to reach 11.75 million tonnes by FY27.
• Inter-corporate deposits from Sagar Cements to Andhra Cements totaled INR 950 million (end-March 2025).

Looking Ahead

• Monitor progress and timeline for obtaining all required statutory, regulatory, and shareholder approvals for the merger.
• Track the finalization of the share exchange ratio and other scheme details after the valuation exercise.
• Watch for India Ratings' resolution of the 'Rating Watch' status, which depends on merger progress and clarity on Sagar Cements' consolidated credit profile.