India Ratings and Research (Ind-Ra) has maintained a stable outlook on the cement sector for FY20. Cement manufacturers are poised to benefit from the continuing demand push, led by the healthy growth expected across end-markets such as individual home building, affordable housing, roads and irrigation sectors. The agency expects the momentum to continue in FY20, propelled by government-led spends in roads and affordable housing schemes. Utilisations are likely to rise but not to the extent that producers would see an increase in pricing power. However, cost pressures will reduce because of stabilisations in input costs and currency movements. This coupled with cost-saving measures could lead to a modest improvement in margins in FY20.
Ind-Ra expects cement demand to grow by a modest 6%-8% over the next year, driven by the diminishing base effect, increased thrust on infrastructure by the central government and various state governments, and the affordable housing segment.
Over the past three quarters, the profitability (EBITDA/tonne) of cement companies has been tested by the increasing costs of inputs, especially power, fuel and freight, as the players have not been able to pass on the rise in full to the customers due to the demand-supply imbalance. Consequently, the companies are expected to post poor results in FY19. However, considering the downtrend in fuel prices since October 2018, Ind-Ra expects the cost headwinds to moderate in FY20. This would lend further support to the margins.
The credit metrics of cement manufacturers are likely to deteriorate in FY19 on account of mergers and acquisitions, high capex and increased input cost. For the issuers rated by Ind-Ra, the net leverage positions are expected to improve, given their strong positions in the regions in which they operate and a stable-to-higher EBITDA per tonne due to steady cement prices and tapering input costs.
The agency believes the capacity utilisations of the cement industry would improve gradually over the next two years on account of limited capacity additions amidst the turnaround of acquired assets. According to Ind-Ra, the sector will witness capacity addition of around 20MTPA per year over FY19-FY21 (with higher addition in FY20), and the capacity utilisation will increase by 120bps and 200bps in FY20 and FY21, respectively. Between 2008 and 2018, demand increased at 6.15% CAGR, while capacity increased at 9% CAGR. As a result, capacity utilisation rates dropped to 64% in FY18 from 83% in FY08, leading to increased competition and pressure on selling prices. Any further demand-supply imbalance at the regional level may impact the profitability of the players.