‘Cement M&A may see action in 6-12 months’

‘Cement M&A may see action in 6-12 months’
Published: 11 November 2008

The Indian cement sector is seeing an upheaval due to government intervention, real estate slowdown and looming oversupply fears, according to an article published in DNA. Sourav Mallik, executive director, Kotak Investment Banking, who closely tracks the cement sector, spoke to DNA Money’s Pooja Sarkar on the outlook for the sector.

What is your outlook for the cement sector?
The sector at present has a capacity of 204 Mta nd a demand of 180-190 Mta with an utilisation rate of 90-95%. With new capacity scheduled to come on-stream, we expect the utilisation rate to drop to mid-80% level. Around 100Mta will be added in the next 3-4 years. Due to the credit crisis, some companies may face delays in achieving financial closure which may delay expansion plans.

Would cement manufacturers go slow with their expansion plans due to oversupply concerns?
Companies could slow their expansion plans as capital is not easily available. The commissioning of new plants will get delayed by 6-12 months and some expansions may get completed in phases. If the capacity utilisation falls to mid-80% levels, the industry will continue to be reasonably stable. However, if this drops to around mid-70% mark, smaller players will begin to feel the heat. New players would face more problems because they need to build their brands and reduce prices to be competitive in the market.

Can you throw some light on difficulties faced by companies regarding financial closure and working capital issues?
Banks are going slow with disbursements, but this is a temporary phenomenon and credit markets should ease up in next three months. Cement companies have not been able to raise equity and are looking at internal accruals, which may lead to a 3-6 months delay in project executions. The past few months have been very challenging for those who were dependent on foreign currency repayments as the rupee has appreciated.

Some players have taken short-term loans at higher rates and some long-term loans could get deferred.

Source: DNA