Outlook on Indian cement manufacturers for 2012: Fitch

Fitch Ratings has come out with its report on cement manufacturers.

Negative Outlook for 2012: Fitch Ratings has a negative outlook for the Indian cement industry in 2012. Operating margins are expected to be stressed due to structural overcapacity, muted demand and high input costs. The overcapacity is likely to continue at least until early 2013.

Muted Demand: Cement volumes are largely the result of real estate construction (driven by the private sector) and infrastructure projects (driven by government spending). Activity in both these sectors is expected to remain muted given low real credit growth. As a result, Fitch expects cement dispatch volume growth to range from 2% to 5% in 2012.

Margin Pressure: Most cement companies are expected to experience pressure on margins in the financial year to end-March 2012 (FY12) due to an increase in operating costs. However, given the expected muted demand, these costs have not been passed onto customers. Fitch expects continued pressure on margins due to the increase in the price of imported coal, which is further aggravated by a depreciating rupee.

Capacity Utilisation: Fitch expects capacity utilisation to fall to 72% in FY12 from 77% in FY11. Southern region capacity utilisation is expected to fall to 59% in from 63% in FY11 due to a larger share of capacity increases, followed by east which is expected to fall to 79% in FY12 from 83% in FY11.

Impact on Credit Profiles: Cement companies are expected to have lower cash flows in FY13 and thus may face liquidity pressure, possibly leading to higher working capital requirements. Fitch notes that the credit profiles of large companies are likely to remain stable due to their strong balance sheets and moderate capex plans. Small- and mid-sized cement companies with high debt-driven capex and limited flexibility in their cost structures may have a deterioration of debt coverage (i.e. EBITDA interest coverage ratio).

What could change the outlook?
Construction Revival: The outlook could be revised to stable if there is a significant revival in the construction of real estate or infrastructure projects. However, renewed real estate activity depends largely on a cut in interest rates, which Fitch does not anticipate until first half 2012. A significant postponement of capex plans that reduce structural overcapacity could be positive for the sector but remains an unlikely scenario.

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