Fitch gives negative to stable rating to cement sector in 2011

Fitch Ratings has said that the agency has a negative to stable rating on the cement sector in the year 2011 because of the continued overcapacity.

The agency said that the sector is likely to suffer from over capacity as the demand is expected to grow at 10 per cent in 2011 and the total capacity addition will be over 12 per cent in the same period. It said, "Overcapacity of 125.8 million tonne (Estimated) by 2013 in the cement sector, which will result in pricing and margin pressure."

According to Fitch, the southern region has a large demand and supply gap which is expected to widen going forward resulting in heavy pricing pressure, followed by western and eastern region, respectively.

The agency expects profitability to remain under pressure in 2011 with prices and costs remaining largely at current levels. "Fitch expects further pricing pressure in the wake of lower capacity utilisation, and notes that regional variations will continue to play a significant role," it said.

Fitch said, "Lower profitability is expected to result in pressure on cash flows from operations, and any large capex will result in negative free cash flows. Consequently, those companies which are in the midst of ongoing capex programmes are likely to be the most impacted, as higher debt levels along with muted earnings will put pressure on key credit metrics. However, the credit metrics of the larger players, ACC Limited ('AAA(ind)'/Stable) and Ambuja Cements Limited (Ambuja, 'AAA(ind)'/Stable) are likely to remain stable, on account of their strong financial profiles."