Over the next three fiscals, India’s cement sector will reverse a six-year trend when incremental demand will outpace incremental supply. While incremental demand is seen doubling to 48 million tonnes (MT) compared with the past three fiscals, incremental supply is seen moderating by a fifth to 31 MT from 39 MT.
That will improve the operating metrics of cement makers.
Demand is being supported by the government’s focus on affordable housing and infrastructure, especially spending on roads, railways and urban development.
Says Sachin Gupta, Senior Director, CRISIL Ratings, “We foresee a sharp recovery in demand this fiscal after demonetization dealt a major blow leading to a 1.2% de-growth last fiscal. The industry should be able to rack up 5-6% compound annual growth rate between this fiscal and 2020, or nearly twice as fast as between fiscals 2015 and 2017.”
The last fiscal was a landmark year that saw the sector signing Rs 32,000 crore of acquisitions. That’s the biggest consolidation the sector has seen in a year and was financed through debt of Rs 25,000 crore.
The acquisitions totted 42 MT of capacity, tantamount to the capacity addition seen in the past 2.5 years. Once these transactions are completed, the acquirers will increase their share of total installed capacity significantly to 37% from 28%. But their share of industry debt will increase from 17% now to 45%.
Synergies from the flurry of acquisitions last fiscal and steady realisations will help improve cash accruals despite an increase in power and fuel costs. A large part of the acquired capacities are in the eastern and central regions, where demand growth is the highest, and that should augur well for the acquirers
As a result, their debt protection metrics will weaken this fiscal, with net debt to operating profit ratio (i.e. net of cash) rising to 2.9 times by the end of this fiscal from 1.5 times in the last. But it would swiftly improve to 1.6 times by fiscal 2020.
Says Nitesh Jain, Director, CRISIL Ratings: “Given all this, CRISIL expects the credit profiles of acquirers it rates to be resilient despite the surge in debt. Volume-led growth in operating profit will swiftly correct debt protection metrics from the levels expected this fiscal.”
However, slower-than-expected demand from the infrastructure sector – as it is linked to government spending – could be a spoiler. The implementation of the Real Estate (Regulation and Development) Act, 2016, could also have a short-term impact on volume growth.
CRISIL rates 26 companies in the cement sector representing 54 per cent of the installed capacity in the country.