Ind-Ra: Ease in Input Costs to Protect Cement Manufactures from Soft Demand in FY17

India Ratings and Research (Ind-Ra) has maintained a stable outlook on the cement sector for FY17. The agency expects cement demand to grow between 4%-6% in FY17 after increasing at 5.6% in FY15 and 2.1% during April-November 2015. The expectation is on the back of a slightly better demand from the construction and infrastructure segments led by government spending. The agency has however revised down its demand estimate for the full year FY16 to around 3% from 6.5%-8.0%.

Ind-Ra expects cement producers to add additional 40mtpa capacity over FY15-FY17 at a CAGR of 4.9%, lower than the CAGR of 5.8% during FY13-FY15 (additional 42mtpa). However, the CAGR capacity addition during FY15-FY17 in east (12.2%), west (6.6%) and north (5.5%) may outpace the expected demand growth in the regions.

Ind-Ra has also revised down its pan-India capacity utilisation rate estimate for FY16 to 69% from its earlier estimate of 73%-75% (FY15: 71%). Ind-Ra expects the capacity utilisation to remain low in the range of 69%-70% in FY17. Capacity utilisation in the eastern region could drop to 66%-67% in FY17 from around 75% in FY15 while that in the south might improve to 60%-61% from 57% during the same period.

In line with Ind-Ra's expectation in the FY16 outlook, the median EBITDA margins of 13 companies (58% of total installed capacity) improved 70bp yoy in 1HFY16 despite realisations being down 1% yoy and volume marginally increasing at 1% during the same period. Despite the adverse impact of around INR35-INR45 on EBITDA/ton due to the District Mineral Fund implemented in September 2015 effective from January 2015, the median EBITDA/ton of these 13 companies increased to INR750 in 1HFY16 from INR684 in 1HFY15 mainly because of the ease in input costs.

Ind-Ra expects the industry to maintain a stable credit profile over FY16-FY17 helped by declining input costs. Cement companies which are not expanding capacities are likely to improve their balance sheets on improved profitability. Cement companies rated by Ind-Ra are also likely to maintain stable credit profiles, supported by their regional market share, cost advantage and absence of debt-led capex.

OUTLOOK SENSITIVITIES

Housing Demand: Ind-Ra does not expect any significant turnaround in housing demand in the near term; however, a higher-than-expected housing demand or significant progress by the government on schemes such as Housing for All or Smart Cities could result in a better cement demand and thus in a positive sector outlook.

Construction/Infrastructure Sector: A lower-than-expected pick-up in construction/infrastructure projects could affect the credit profile of cement players and result in the sector outlook being revised to negative.

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