The rating agency India Ratings & Research (Ind-Ra) has retained a stable negative outlook for the cement sector for the financial year 2015. According to Ind-Ra, a limited downside risks is expected for the top three integrated players in the industry and in turn likely to maintain a stable outlook on their long-term issuer rating for FY15. The median EBITDA margin of these top players is unlikely to fall more than 50bp-100bp y-o-y in FY15. However, non-integrated players placed on the cost curve may continue to face pressure on their credit profile and thus a negative outlook.

The resilience of these top integrated players to adverse macroeconomic factors is displayed in the form of a similar credit profile for the past two to three years. Although these players could see some margin pressure; it would not impact on their credit profile. Whereas non-integrated players are likely to continue to witness a deteriorated credit profile till FY15, due to lack of control on cost, regional concentration and limited pricing power.

Cement Plant_ProjectsMonitorThe agency also foresees a sluggish growth for cement demand, at around 5%-6% for FY15, due to the slowdown in the construction and infrastructure sectors. But at the same time the growth will be supported by an expected increase in demand from the rural sector and tier-II and tier-III cities. Ind-Ra also depicted that there could also be some uptick in demand from second half of the financial year 2015 due to a provision in the Union Budget of 2013-2014 for an investment allowance for infrastructure projects of Rs. 1,000 million and above between April 1, 2014 and March 31, 2015. Besides, the upcoming election results would also impact the overall growth of construction industries.

While the integrated players suffer with a low demand, the non-integrated players would likely to deteriorate due to limited pricing power and rising costs. The EBITDA margins of non-integrated players has already fallen to 11 per cent in the first half of the financial year 2014 from 18 per cent in FY13 and that of the integrated players to 18.5 per cent from 22.7 per cent. The difference of EBITDA margins between top five players and non-integrated players was 750bp. The agency expects EBITDA margins for top five integrated players to be around 19%-22% for FY-15 and of non-integrated to be around 11%-13%.

Cement companies do not have the pricing power to pass on cost increases to customers due to the sluggish demand. There was a substantial increase in the overall cost structure in FY13. Median freight costs increased 17% y-o-y in FY13 due to an increase in rail freight rates and higher diesel prices.

Due to the lower demand, the overall capacity addition will be moderate; and the capacity additions would grow at a CAGR of 6 per cent from FY13 to FY16, more than a 4 per cent CAGR increase in demand in the same period.

Factors to change the outlook: This negative outlook could be changed if there is an improvement in infrastructure spending and from formation of a stable government from the general elections, which may enable higher investment in infrastructure leading to an improvement in cement demand.


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