Infra and construction likely to pull down cement demand

India Ratings maintains a stable negative outlook for cement sector for FY15 mainly on the back of slowdown in the construction and infrastructure segments
Cement demand is likely to remain sluggish next fiscal with around 5—6 per cent growth impacted by slowdown in construction and infrastructure sectors, India Ratings and Services said in a report.
The agency expects that the growth will be supported by an expected increase in demand from the rural sector and Tier II and Tier III cities. There could also be some uptick in demand from second half of next fiscal 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 1 April 2014 to 31 March 2015. Also, election results will impact overall growth in construction activities, the agency anticipates.
The rating agency has, however, maintained its “stable to negative” outlook for the sector for the next fiscal. It expects limited downside risks for integrated players who are also among the top two to three players in their respective regions. They are likely to maintain a stable outlook on their long-term issuer rating for fiscal. The median EBITDA margin of this group is unlikely to fall more than 50 bp-100 bp year-on-year 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”.
Ind-Ra expects the top five integrated players to see some margin pressure; however, it would not impact on their credit profile. 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.
Ind-Ra expects the credit profile of non-integrated players to further deteriorate due to limited pricing power and rising costs. The EBITDA margins of non-integrated players fell to 11 per cent in 1HFY14 from 18 per cent in FY13 and the margins of integrated players fell 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 per cent-22 per cent for FY15, while non-integrated it would be around 11 – 13 per cent.
The agency observes, 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 per cent y-o-y in FY13 due to an increase in rail freight rates and higher diesel prices.
Ind-Ra expects overall capacity addition will be moderate as incremental demand will be lower than incremental supply. Capacity additions will 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.
Outlook Improvement in Infrastructure SpendingA stable outlook could result from formation of a stable government post general elections, which may enable higher investment in infrastructure leading to an improvement in cement demand. However, a fractured electoral mandate with the potential for an unstable government would be negative for the sector.
External factorsTo the extent, the current level of global economic activity and risk appetite is maintained, the outlook will remain unaffected. However, a lower-than-expected global growth rate or an increase in risk aversion, which may affect rupee depreciation, is likely to moderate economic activity domestically. As such, the credit profile of the sector may be adversely affected.

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