Cement industry: stable foundation

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: Cement, though a cyclical and capital intensive industry, has demonstrated a high degree of stability of the credit ratings assigned. In fact, the degree of stability historically exceeds that of the steel industry, another capital-intensive sector closely associated with construction activity. A comparison of the two sectors offers interesting insights into the reasons for the stability of ratings, even in cyclical industries.

This study reveals that Crisil's cement sector ratings have demonstrated more stability in last 10 years than those of steel companies; top cement players have largely remained in the AA category, while steel players have moved in the BB to AA+ range. Rather than price stability, this is attributable to better operating leverage, better capital structure as well as the lower linkage to commodity prices that cement companies enjoy.

The stability reflects an observed phenomenon of highly rated entities…

An analysis of the large universe of Crisil-rated companies, reveals that higher-rated entities demonstrate greater rating stability than their lower rated counterparts. This stability is a reflection of the stronger business and financial profiles of higher rated companies which makes them less susceptible to changes in business cycles; the finding is in line with global ratings experience.

The graphs below demonstrate how the historically higher concentration of Crisil-rated cement companies in the higher rating categories is reflected in their greater rating stability vis-à-vis steel companies.

The fundamental reason for the stability of the cement ratings is the relatively lower business volatility in the sector over the last 10 years as compared to steel. This is also reflected in the relative stability in the financial profile of the rated cement companies.

Stability in the financial profile of the cement companies is reflected in their RoCE and PAT margins

Volatility in a sector is manifested at two levels - the overall returns reflected in the RoCE and profitability reflected in net margins. RoCE of cement players have been higher and more stable than those of steel companies.

Similarly net margins - which provides a cushion against business volatility - of cement producers have been more stable (8% to 15%) than those of steel manufactures (-13% to 12%).

However, in the last few years, the Crisil rated steel companies have demonstrated a significant turnaround.