01 Mar 2019
Resilient demand, moderate capacity addition, tapering costs
India Ratings and Research (Ind-Ra) has maintained a stable outlook on the cement sector for FY2020. Cement manufacturers are poised to benefit from the continuing demand push, led by the healthy growth expected across end-markets such as individual home building, affordable housing, roads and irrigation sectors. The agency expects the momentum to continue in FY2020, propelled by government-led spends in roads and affordable housing schemes. Utilisations are likely to rise but not to the extent that producers would see any increase in pricing power. However, cost pressures will reduce because of stabilisations in input costs and currency movements. This coupled with cost-saving measures could lead to a modest improvement in margins in FY2020.
Ind-Ra expects cement demand to grow by a modest 6 per cent to 8 per cent over the next year, driven by the diminishing base effect, increased thrust on infrastructure by the Central Government and various state governments, and the affordable housing segment.
Over the past three quarters, the profitability (EBITDA/tonne) of cement companies has been tested by the increasing costs of inputs, especially power, fuel and freight, as the players have not been able to pass on the rise in full to the customers due to the demand-supply imbalance. Consequently, the companies are expected to post poor results in FY2019. However, considering the downtrend in fuel prices since October 2018, Ind-Ra expects the cost headwinds to moderate in FY2020. This would lend further support to the margins.
The credit metrics of cement manufacturers are likely to deteriorate in FY2019 on account of mergers and acquisitions, high capex and increased input cost. For the issuers rated by Ind-Ra, the net leverage positions are expected to improve, given their strong positions in the regions in which they operate and a stable-to-higher EBITDA per tonne due to steady cement prices and tapering input costs.
The agency believes the capacity utilisations of the cement industry would improve gradually over the next two years on account of limited capacity additions amid the turnaround of acquired assets. According to Ind-Ra, the sector will witness capacity addition of around 20 mtpa over FY2019-FY2021 (with higher addition in FY2020), and the capacity utilisation will increase by 120 bps and 200 bps in FY2020 and FY2021, respectively. Between 2008 and 2018, demand increased at 6.15 per cent CAGR, while capacity increased at 9 per cent CAGR. As a result, capacity utilisation rates dropped to 64 per cent in FY2018 from 83 per cent in FY2008, leading to increased competition and pressure on selling prices. Any further demand-supply imbalance at the regional level may impact the profitability of the players.