Demonetisation to derail cement sector growth: Ind-Ra

The recent government's demonetisation initiative is expected to derail the growth of the cement sector says India Ratings and Research (Ind-Ra).
"Cement production is likely to grow by around 4 per cen in FY17; as against our earlier estimation of 4 to 6 per cent growth for FY17. We expects the credit profile of pan India cement players and strong regional players to remain stable; however the credit profile of small and medium cement companies, with high debt levels will come under stress in the next two quarters," Ind-Ra said in a statement here.
In its report 'Market Wire: Black Day for Black Money - Structural Benefits of Demonetisation Outweigh Short Term Agony' Ind-Ra said that the impact of this policy measure will flow to the economy mainly through the real estate/construction sector, which has strong linkages with sectors such as cement and steel and they will turn credit negative in the short-run.

The lower cement output for FY17 is expected due to the fall in production of the sector in the month of November-December 2016. Cement production has grown by 4.3 per cent during April-November 2016 and it recorded a growth of 0.5 per cent in November 2016, 6.2 per cent in October and 5.5 per cent in September last year.
The agency notes that post demonetisation all India volumes declined in the range of 20-25 per cent in November-December 2016 while pan-India realisations have declined in the range of Rs 15/bag-Rs 20/bag in the same period.
Pet coke which is a key raw material for the sector has shown an upward movement in prices to around USD60-USD70 per tonne from USD 40 per tonne at the beginning of the financial year.

The rise in pet coke prices coupled with increase in diesel prices is likely to increase power, fuel and freight costs for companies. The higher input cost and lower demand is expected to limit the ability of cement manufacturers to pass on the higher prices to the end consumers, thus potentially squeezing margins.
Ind-Ra expects that post demonetisation, demand from the housing sector, which contributes around 65 per cent of cement demand is likely to declined further. The demand from individual home builders which mainly consists of farmers are expected to increase in FY17, due to a better monsoon; however post demonetisation Ind-Ra expects that cash availability with individual home builders will also be limited.

Ind-Ra believes that the working capital cycle for cement companies is likely to increase (most cement companies are net working capital negative) due to the likely additional credit given to dealers, as most of dealers have shifted to digital payments.