Credit Profile Of Cement Manufacturers Intact Despite Falling Volumes

The lagged impact of the cash crunch and polls will take a toll on cement production in fourth quarter of financial year (FY) 2016-17. Latest data shows cement volumes in February 2017 declined 15.8 percent year-on-year, the most in over a decade, says India Ratings and Research.

Volumes have declined 5 percent month-on-month. India Ratings notes that the decline in cement growth is also on account of a high base last year. During January-March 2016, cement production grew by 9.2 percent, 13.5 percent and 11.9 percent year-on-year respectively. India Ratings estimates cement production to be muted in Q4FY17.

On the prices front, the wholesale price index of grey cement and slag cement has shown a softening trend through November 2016-January 2017. Cement players got some respite on the cost front, with pet-coke and coal prices showing moderation in January and February 2017, after pet-coke prices almost doubled since March 2016.

Volumes of pan-India cement players in Q3FY17 contracted 5 percent year-on-year; while those for central and north based players fell 3 percent and 6 percent respectively. The southern region in contrast showed strong volume growth of 21 percent. Growth in the southern region is led by an increase in government expenditure in the state of Andhra Pradesh and Telangana.

An analysis of the financials of cement companies in Q3FY17 by India Ratings showed that the median EBITDA per tonne of pan-India players declined marginally in Q3FY17 compared to the previous quarter, though it remained comfortable at around Rs 975 per tonne.

Median power, fuel and freight cost per tonne in Q3FY17 increased from Q2FY17 levels to Rs 977 and Rs 1,217 respectively. While the median EBITDA per tonne of the rest of India's players declined quarter-on-quarter in Q3FY17 to Rs 878; while power, fuel and freight cost per tonne in Q3FY17 declined marginally to Rs 771 and Rs 867 respectively.

India Ratings expects EBITDA per tonne of pan-India players to remain comfortable at around Rs 975-1,000; while that of players with a presence in rest of India's is likely to be around Rs 850-875 in FY18.

The credit profile, in terms of EBITDA interest coverage for pan-India players declined marginally in Q3FY17 but remained comfortable at around 11 times. The EBITDA interest coverage ratio of the rest of India cement players was stable at around 2 times at the end of Q3FY17.

On the policy front, due to the recent measures announced by the Ministry of Railways that require long term agreements/contracts for industries like cement, steel and fertilisers, cement companies may see an improvement in demand.

As per the policy, the Ministry of Railways will provide a minimum guaranteed volume linked discount, on the basis of incremental growth in gross freight revenue, in return for a commitment to provide a minimum guaranteed quantity of traffic. The discounts will range from 1.5 percent to 35 percent, as per the incremental growth in gross freight revenue.

India Ratings believes that these initiatives will increase the transport of cement through rail and cement manufacturers will be able to control freight cost more effectively. However, India Ratings notes that rake availability during peak season and railway network are likely to act as constraint to this policy.

(India Ratings and Research a wholly owned subsidiary of Fitch Group is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.)