India Ratings revises 2013 outlook for cement manufacturers

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Indian cement manufacturers. Indian cement manufacturers.
SummaryThe agency expects credit profiles of large cement firms with superior cost position and pan-India presence to remain stable in 2013.

India Ratings has revised its outlook for Indian cement manufacturers to "stable to negative" for 2013 from negative in 2012, driven by limited downside risk for demand.

The ratings agency also expects consolidation in the medium-to-long-term with large M&A activities, according to a report.

"We expect consolidation in cement industry in the medium-to-long-term with large M&A activities in the sector," the rating agency said.

The agency expects credit profiles of large cement firms with superior cost position and pan-India presence to remain stable in 2013; however, smaller companies with unfavourable cost structure and regional concentrations are likely to be under pressure.

With credit growth of the housing sector at 13 per cent and that of the commercial real estate sector (CRE) at 4 per cent till November 2012, India Ratings expects the cement demand to grow between 5-8 per cent y-o-y in 2013.

Cement production volume in 2012 was mainly driven by a relatively robust activity in housing and commercial real estate. From September 2010 to March 2012, the average growth in credit to the housing sector was around 15 to 16 per cent in commercial real estate.

Large integrated players, who are among the top five in the country (in terms of production capacity), are likely to have median EBITDA margins in the range of 23 per cent to 24 per cent in 2013, comparable to the FY12 levels.

However, smaller or partially-integrated players are likely to exhibit margins ranging from 17 to 19 per cent, lower than the median margins observed for such companies in FY12, the report said.

On consolidation front, the report says top five companies, constituting around 50 per cent of the industry capacity, enjoy a better cost structure driven by significant vertical integration and locational advantage with respect to sourcing of raw materials and market access.

"Most other companies, because of lack of one or more of these factors, have a weaker competitive position. The industry economics and the regulatory actions exhibited by the Competition Commission of India (CCI) may push marginal players to consolidate", the ratings agency said.

According to the report, not all marginal companies would attract acquirers.

"Companies with either access to resources (raw material and power/fuel) or proximity to relatively under-served markets or both, are most likely to be targeted for consolidation", it said. As domestic cement industry is the second-largest producer in the world, it attracts many international cement companies.

Many international players have already entered into the market by

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