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Gujarat Guardian Limited

Rs. 200 million

Short-Term Debt
Programme including
Commercial Paper
retained at A1+

31.03.02 31.03.01 31.03.00

Net Sales 3070.90 3038.10 2700.60
Operating Income 3071.10 3057.60 2710.21
Equity Capital 1570.00 1570.00 1570.00
PBIT/ (Total Debt
+ Net Worth) (%) 30.33 29.71 22.80
OPBDIT/ (Interest &
Finance Charges) (Times) 6.09 3.38 2.42
Net Cash Accruals/
Total Debt (%) 84.85 45.75 23.17
Total Debt/Net Worth (Times) 0.64 1.61 4.08
Current Ratio (Times) 1.46 1.59 1.90

Note: Amounts in Rs. million

Rating

The rating for the Rs. 200 million Short-Term Debt Programme including Commercial Paper (CP)
of Gujarat Guardian Limited (GGL) has been retained at A1+ (pronounced A one plus), indicating
highest safety in the short term. The prospect of timely payment of debt/obligation is the best. The
earlier rating of A1+, assigned in March 2002*, was based on a credit enhancement in the form of
a standby facility for Rs. 200 million, extended by ICICI Bank.

*Detailed rationale published earlier in the August 2002 issue of ICRA Rating Profile.

Background and Business

Promoted by Guardian Industries Corp. (majority promoter with a 50% shareholding), Gujarat
Alkalies and Chemicals Limited, and Modi Rubber Limited, GGL’s 150,000 metric tonnes per
annum (mtpa) float glass plant at Ankleshwar, Gujarat, started production in 1993. The plant has
been operating at over 110% of its capacity during the past three years and reported 115%
capacity utilisation in FY2002.

GGL manufactures mainly three types of glass: clear glass with thickness varying from 2 to 19
mm, tinted glass, and mirror glass. The value-added products such as tinted glass and mirror
glass fetch higher sales realisations than clear glass, whose prices increase with thickness. For
clear glass, domestic realisations are higher than export realisations.
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Float glass has certain inherent advantages over sheet glass, such as uniform thickness, high
strength and distortion- or ripple-free surface. Besides, float glass can be further processed to
impart safety properties for use in automotives (windscreens, rear and side windows). Float glass
is gradually edging out sheet glass globally, and the demand for float glass is expected to
continue increasing as users’ standard of living improves.

Float glass manufacturers cater mainly for the construction industry (accounts for 70% of the
domestic demand), the automotive industry, and the mirrors and furniture sector. The demand for
float glass from the construction segment, the primary user worldwide, is driven mainly by
architectural trends, refurbishment requirements and cost considerations (for the same area glass
is cheaper than wood or concrete). Tinted float glass is preferred where aesthetics and energy
efficiency (by controlling transmission of light and heat) are the prime considerations.

Update on Major Developments

Operating Performance
Market share drops as domestic market reports lower growth and competing plant puts in
full year of operations: The commissioning of the Saint-Gobain plant in July 2000 caused a
drop in the market shares of all the other domestic flat glass manufacturers in FY2001. In
FY2002, with the Saint-Gobain plant putting in full 12 months’ operation and the domestic market
reporting low growth, the domestic market shares of all the other flat glass manufacturers
dropped further. The domestic market share of GGL, in particular, dropped from a high of 32%
during FY2000 to 28% in FY2001 and further to 25% in FY2002, although the company still
maintained its leadership position in the domestic market. The decline in sales of both clear and
tinted glass, which together account for over 80% of GGL’s domestic sales, led to an overall drop
in domestic sales volumes despite the marginal improvement in mirror glass sales.

Export volumes decline mainly because of drop in tinted glass exports: During FY2001,
GGL’s export of tinted glass had reported a significant increase (around 400%) because of a
shortage of tinted glass in the international markets following plant shutdowns and a sudden spurt
in demand. In FY2002, the cyclical nature of the tinted glass market, besides the slowdown in
some of the export markets, led to a 23% drop in GGL’s export of tinted glass. In the clear glass
segment, GGL’s low domestic sales because of the Saint-Gobain plant reporting a full year’s
operation prompted GGL to raise exports by as much as 174%. Domestic manufacturers prefer
selling in India (and export the balance) since the realisations are higher in the domestic market.
GGL’s exports of mirror glass declined by 18% in FY2002 because of improved demand for
branded mirrors in the domestic market. However, since tinted glass accounts for a major portion
of GGL’s export volumes (85% during FY2001 and 63% during FY2002) the overall export
volumes declined in spite of the 174% rise in exports of clear glass.

Launch of new types of mirrors: GGL’s new Mirror Line has been fully operational since the
beginning of FY2003. The replacement of the old Mirror Line was undertaken at a cost of Rs. 150
million. The company has recently introduced the new MODIGUARD GMP (Green Mirror
Processing) Mirrors. Preliminary figures indicate that the new product has been well received in
the domestic market. Incidentally, GGL is the leading producer of branded mirrors in the domestic
market. This segment currently accounts for over 15% of the total domestic sales by volume and
is the highest contributor to profitability. The new and improved Mirror Line along with the new
launches in this segment should help GGL increase its mirror sales and price realisations further.

Financial Performance
Improved sales realisations prevent drop in operating income: During FY2002, there was a
drop in GGL’s overall sales volumes because of the 5% decline in both exports and domestic
sales. However, the overall improvement in price realisations on the strength of the higher sales
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of thicker clear glass helped GGL negate the effect of the drop in sales volumes, thereby allowing
its operating income to remain at the previous year’s levels. During FY2002, there was a higher
proportion of clear glass in the above 12 mm category in GGL’s total sales mix, leading to
improved sales realisation (glass prices increase with thickness). Moreover, in the mirror glass
segment, the company’s domestic sales were higher than exports, resulting in better realisations.

Operating margins constant despite drop in sales of value-added products: The margins on
value-added products such as mirrors and tinted glass are significantly higher as the incremental
costs are low compared with the incremental realisations. During FY2002, there was a significant
drop in GGL’s sales of tinted glass. But despite that, the company’s operating margin
(OPBDIT/OI) remained at the FY2001 levels mainly because of higher domestic sales (which
offer higher realisations), and savings on power and fuel cost because of better capacity
utilisation.

Lower interest costs lead to higher net profits: During FY2002, GGL’s operating profit
(operating income - cost of sales) remained at almost the same level as in FY2001 in absolute
terms. However, the 42% drop in interest costs because of the reduction in interest rates and pre-
payment of some portion of its loans helped GGL report a 24% rise in net profit in FY2002. The
improved profitability during the past two years led to a significant improvement in GGL’s return
on capital employed over the same period.

Improvement in gearing and coverage indicators: An increase in GGL’s reserves and a

reduction in its debt stock resulted in the company’s gearing (Total Debt/Tangible Net Worth)
declining from 4.08 times as on March 31, 2000 to 0.64 time as on March 31, 2002. During the
period FY2000 to FY2002, GGL’s interest coverage (OPBDIT/ Interest & Finance Charges)
improved from 2.42 times to 6.09 times. The company is expected to be free of all long-term debt
obligations by the end of calendar 2003, which should lead to a further improvement in its gearing
and coverage indicators.

Liquidity position comfortable: GGL’s unutilised lines of credit, besides the excellent terms it
enjoys with its existing bankers, provide for a comfortable liquidity position. In FY2002, the
company’s receivables and creditors for raw materials remained more or less at the previous
year’s levels of one month’s sales and two months’ purchases, respectively.

Prospects

The future profitability of domestic float glass manufacturers depends to a great extent on the
performance of the user industries and the extent to which sheet glass is substituted with float
glass. The construction and automotive industries comprise the major user industries for flat
glass, accounting for almost 85% of the total flat glass produced domestically. The automotive
industry in India, although not a major user at present, is expected to generate significant demand
in future with the increase in safety consciousness of people. The demand from the construction
and furniture sectors is likely to be sustained by the change in preference following improvements
in standard of living. On the whole, the domestic market for float glass is expected to grow at the
annual rate of 6-7%.

GGL’s profitability, in particular, would depend on its plant’s capacity utilisation level. The
company’s domestic market share is not expected to increase from its current levels in the face of
higher competition both from domestic flat glass manufacturers as well as Indonesian and
Chinese flat glass manufacturers. However, with no new domestic capacity in the pipeline, the
growth in the flat glass market may enable existing manufacturers to sell higher volumes in the
domestic market. GGL’s price realisations in the domestic and export markets as well as the
share of value-added products in its total sales would determine its operating income. The
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company’s established brand name and its access to export markets by virtue of its arrangement
with Guardian is expected to help GGL maintain its current sales level. The company’s operating
margins might come under pressure because of the existing overcapacity in the domestic market
and the competitive conditions in the international market. However, GGL, because of its
favourable capital structure, is better placed to mitigate the likely threat to profitability. The
company’s liquidity and debt coverage should improve from their current levels in view of its
healthy cash accruals and low outstanding debt.

Key Issues

During FY2002, the improved price realisations, especially in the domestic market, helped GGL
offset the decline in sales volumes. The company is a leader in the domestic flat glass market by
virtue of the competitive strength it derives from its established brand, low cost of production and
higher capacity utilisation. However, the future, GGL’s price realisations and hence profitability
are likely to come under strain, given the existing overcapacity in the domestic market, the
increased competition from Chinese and Indonesian float glass manufacturers, and the declining
import duties.

With reduction in debt and lowering of interest rates, GGL’s interest charges have declined. The
company is expected to be free of all long-term debt obligations by the end of calendar 2003.
GGL’s unutilised lines of credit offer additional comfort.

The rating factors in the decline in GGL’s financial risk on account of the improvement in its
financial performance, the reduction in its debt, and the lowering of interest rates, which have
strengthened the company’s cash accruals. These apart, the rating also considers GGL’s
leadership position in the Indian flat glass market and the support it gets from its main promoter,
Guardian Industries Corp.

September 2002

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