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January 2017
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| Cement Sector (The Total Investment & Insurance Solutions) |
Demonetisation is likely to derail the growth
of the cement sector, with small and medium cement manufacturers feeling the
heat, says India Ratings and Research (Ind-Ra).
Ind-Ra 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. The Total Investment & Insurance Solutions
The ratings agency feels that the impact of
demonetisation 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 Total Investment & Insurance
Solutions
Ind-Ra expects that post demonetisation,
demand from the housing sector, which contributes around 65% to cement demand,
is likely to decline. The demand from individual home builders, which mainly
consists of farmers, is expected to increase in FY16-17 due to a good monsoon. However,
post demonetisation, Ind-Ra expects that cash availability with individual home
builders will also be limited.
Cement production is likely to grow by around
4% in FY16-17 as against Ind-Ra's earlier estimate of 4%-6%. The lower cement
output for the year is expected to be due to the fall in production in
November-December 2016. Cement production has grown by 4.3% during
April-November 2016 and recorded a growth of 0.5% in November 2016. The Total Investment & Insurance
Solutions
Post demonetisation, Ind-Ra says all India
volumes declined in the range of 20%-25% in November-December 2016, while
pan-India realisations have declined Rs15 to Rs20 per 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 $60-$70 per tonne from
$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," the ratings
agency says.
Ind-Ra believes that the working capital
cycle for cement companies is likely to increase as most cement companies are
net working capital negative, due to the likely additional credit given to
dealers as most dealers have shifted to digital payments.The Total Investment & Insurance
Solutions
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