Infra pulls down cement sector's ratings

Due to limited pricing power and rising costs, rating agency expects credit profile of cement players to deteriorate

Slowdown in the infrastructure and construction sectors is making India Ratings retain a stable to negative outlook on the cement sector.

Demand for the commodity in a muted market will remain sluggish at around five to 6%, in 2014-15. “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 in the second half of the next financial year due to a provision in the Union Budget of 2013-2014 for an investment allowance for infrastructure projects of Rs 100 crore and above between April 1, 2014 to March 312, 2015,” said India Ratings, in a report.

Due to limited pricing power and rising costs, the rating agency expects the credit profile of cement players to deteriorate. Low demand will not allow cement companies to pass on their rising costs, mostly due to increase in freight costs and diesel prices.

“The EBITDA margins of non-integrated players fell to 11% in the first half of the current financial year from 18% 2012-13 and the margins of integrated players fell to 18.5% from 22.7%,” said India Ratings.

The agency expects that the overall capacity addition will be moderate and incremental demand will be lower than incremental supply. “Capacity additions will grow at 6% from 2012-13 to 2015-16, more than a four% demand increase in the same period.” it said.

However, the outlook on the sector could change and become stable, if stable government forms after the Elections. It could enable higher investment in infrastructure leading to improvement in demand.