Small cement companies continue to drive on despite headwinds of cost pressures seen in the financial year just ended (FY23), larger cement companies expanding their market share, and lower efficiencies. Parent company support and low debt profile saved the day for these small players, according to industry and rating agency executives.
The stress was expected to bring smaller companies to the sale table. Instead, many have managed to tide over the tough time.
With earnings before interest, taxes, depreciation and amortisation (EBITDA) per tonne in triple digits, the quarter-ended September 2022 was a total washout for most major cement companies. Strapped with a smaller scale, cost pressures pinched smaller cement companies harder.
Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, explained that smaller cement companies are likely to face higher headwinds due to a lack of scale and cost efficiencies which will bring down their EBITDA per tonne to a larger extent.
Take Keerthi Industries, for instance. CareEdge revised the outlook for the company to ‘negative’, from the earlier ‘stable’ due to moderation in its financial and operational performance in H1FY23. CareEdge, however, reaffirmed Keerthi Industries’ rating at CARE BBB (negative) due to a host of factors, including experienced promoters, capital structure, and debt coverage indicators, among others.
Ravleen Sethi, Associate Director at CareEdge, pointed out similar factors have helped smaller companies in the agency’s rating universe tide over the tough operational quarters of FY24.
“In our rated universe, most of the smaller cement players (less than five million tonnes installed capacity) are the ones belonging to stronger parent or group. For these, we have seen either parental support or strong liquidity, which they had built in the last two good years, help them tide over the relentless cost pressures witnessed in Q2 and Q3 of FY23,” she said.
Chowdhury added a low debt burden has softened the hit on most players. “The debt burden in most of these companies is currently moderate due to lack of further capital expenditure. While the credit profile of the smaller players will remain vulnerable, we don’t see any immediate pressure on their ratings,” he said.
Not all small cement companies, however, have been so fortunate.
In March, ICRA downgraded Toshali Cements (TCPL) to ‘default’ rating due to continued pressure on its profitability amid elevated input prices, thereby impacting the liquidity position.
Consolidation eludes
Sethi from CareEdge said, “There was an expectation of some consolidation in the industry owing to the liquidity stress on smaller companies, but nothing significantly materialised in FY23.”
Chowdhury from Acuite added, “While consolidation in the domestic cement sector is highly likely over the next few years, it may take time due to valuation issues.”
Prashant Bangur, Vice Chairman of Shree Cement, pointed out that low debt may have helped avoid sale. “Yes, in terms of EBITDA per tonne, the September quarter was one of the worst for the cement sector, but there are not many companies in the industry that are heavily in debt,” Bangur said. He added, “The assets that are in the market are not there due to distress.”
