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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 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.

 

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. 

 

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.

Source: MoneyLife