Cement sector may see incremental demand due to increase in infra spending by government, CRISIL

The Dollar Business Bureau

"We foresee a sharp recovery in demand this fiscal after demonetisation dealt a major blow, leading to a 1.2% de-growth last fiscal,” rating agency CRISIL said on Monday.

The cement sector may see incremental demand outpace the incremental supply in the coming three fiscals due to the government’s spending on infrastructure, the rating agency said.

According to the agency, incremental demand could be doubling to 48 million tonne when compared to the past three fiscals, while incremental supply is seen moderating to a fifth to 31 MT from 39 MT. Demand is likely to increase due to the government’s increase in expenditure on railways, urban development and roads the report detailed.

"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, CRISIL Ratings Senior Director Sachin Gupta said.

Last fiscal the sector signed up Rs 32,000 crore of acquisitions, financed through a Rs 25,000 crore debt, which was termed as the biggest consolidation that the segment has seen in a year, the report detailed.

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, the report said.

As a result, their debt protection metrics will weaken this fiscal, with net debt to operating profit ratio 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, it said.

"We expect the credit profiles of acquirers it (CRISIL) 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," CRISIL Ratings director Nitesh Jain said.

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 could also have a short-term impact on volume growth, the rating firm added.