Fitch: negative outlook for India cement in 2011

Fitch: negative outlook for India cement in 2011
Published: 06 January 2011

Fitch Ratings says the 2011 outlook for the Indian cement sector is negative to stable, reflecting continued overcapacity during the year, which would lead to continued pressure on cement prices. The agency notes that although the anticipated capacity increases are likely to outstrip the growth in cement demand in FY11 and FY12, many of the larger players with strong balance sheets will be able to withstand the pressure. Fitch forecasts a growth in demand of around 10% and a growth in total capacity addition of 12% in 2011.

The widening demand-supply gap is expected to affect the capacity utilisation levels of the cement companies. Fitch expects further pricing pressure in the wake of lower capacity utilisation, and notes that regional variations will continue to play a significant role. The south region with a large demand/supply gap, which is expected to widen further, is likely to witness particularly heavy pricing pressure, followed by the west and east regions. The agency notes that although the current forecast indicates substantial capacity expansions over FY11-FY13, the actual additions -- especially those projected for FY13 -- could be materially lower. This would result in a faster recovery in utilisation levels for the sector and consequently profitability and key credit metrics as well.

Revenues of the cement companies were weak during June 2010-September 2010 on account of lower cement prices, and are expected to remain subdued with price declines offsetting the impact of growing volumes. Furthermore, raw material (mainly coal) and freight costs have also been on a rising trend, further affecting profitability of the cement companies. Fitch, however, expects cost structures to remain largely stable over the medium-term, barring some increase in power and fuel prices. The agency expects profitability to remain under pressure in 2011 with muted prices, lower capacity utilisations and costs remaining largely at current levels. However, the recovery in utilisation levels could be earlier than currently envisaged if some of the major capex programmes are deferred.

Lower profitability is expected to result in pressure on cash flows from operations, and any large capex will result in negative free cash flows. Consequently, those companies which are in the midst of ongoing capex programmes are likely to be the most impacted, as higher debt levels along with muted earnings will put pressure on key credit metrics. However, the credit metrics of the larger players, ACC Limited (’AAA(ind)’/Stable) and Ambuja Cements Limited (Ambuja, ’AAA(ind)’/Stable) are likely to remain stable, on account of their strong financial profiles.