Fragile recovery unlikely to benefit smaller cement players

India Ratings-Mumbai-10 January 2013: India Ratings has revised its outlook for Indian cement manufacturers to "stable to negative" for 2013 from negative in 2012, driven by limited downside risk for demand. The agency expects credit profiles of large cement companies with superior cost position and pan-India presence to remain stable in 2013; however, smaller companies with unfavourable cost structure and regional concentrations are likely to be under pressure. Large integrated players, who are among the top five in the country (in terms of production capacity), are likely to have median EBITDA margins in the range of 23% to 24% in 2013, comparable to the FY12 levels. However, smaller or partially-integrated players are likely to exhibit margins ranging from 17%-19%, lower than the median margins observed for such companies in FY12. With credit growth of the housing sector at 13% and that of the commercial real estate sector (CRE) at 4% till November 2012, India Ratings expects the cement demand to grow between 5%-8% yoy in 2013. Cement production volume in 2012 was mainly driven by a relatively robust activity in housing and commercial real estate. From September 2010 to March 2012, the average growth in credit to the housing sector was around 15% and around 16% in commercial real estate. In India Ratings' assessment before April 2010, the cement demand growth showed a positive correlation (0.33-0.55) with credit growth to infrastructure, construction and roads sector, with a lag of three to six months. However, after April 2010, the demand growth has shown a positive correlation (0.3-0.5) with credit growth of housing and CRE sector, with a lag of six to nine months. The agency expects capacity additions to be moderated in the medium term (5%-7% of total capacity) as the Indian cement industry has already witnessed large capacity additions between FY08-FY11 in anticipation of demand. Capacity additions were moderate at 5% of total capacity in FY12. Capacity utilisations were at around 71% in FY12, in line with India Ratings' expectations. With moderate capacity additions and stable demand growth, India Ratings expects capacity utilisations in FY13 to be around FY12 levels. The agency expects utilisation to improve significantly only by FY15. However, South Indian companies are likely to face pressure on capacity utilisations due to over supply in the region. The agency expects consolidation in the cement industry in the medium-to-long-term with significant M&A activities in the sector. Consolidation targets are more likely to be the companies which either have access to resource (raw material and power/fuel) or have proximity to relatively underserved markets. India Ratings-rated cement companies include ACC Limited ('IND AAA'/Stable), Ambuja Cements Limited ('IND AAA'/Stable), Rain Cements Limited ('IND A-'/Stable) and Kalyanpur Cement Limited ('IND D'). A full report, '2013 Outlook: Indian Cement Manufacturers', is available at www.indiaratings.co.in.