The move of the Narendra Modi government to impost a ban on higher denomination currency notes is likely to derail the growth of the country's cement sector, says India Ratings and Research.
The agency estimates the cement production to grow at around 4 percent compared to its earlier estimates of 4-6 percent for financial year 2016-17.
India Ratings expects the credit profile of pan India cement players and strong regional players to remain stable. However, the credit profile of small and medium cement companies, with high debt levels will come under stress in the next two quarters.
The agency believes that that the impact of this policy measure will flow to the economy mainly through the real estate and construction sector, which has strong linkages with sectors such as cement and steel and they will turn credit negative in the short-run.
The lower cement output for FY17 is expected due to the fall in production of the sector in the months of November and December 2016. Cement production has grown by 4.3 percent during April-November 2016 and it recorded a growth of 0.5 percent in November 2016.
The agency notes that post demonetisation, all-India volumes declined in the range of 20-25 percent in November-December 2016; while pan-India realisations have declined in the range of Rs 15-20 per bag in the same period.
Pet coke, which is a key raw material for the sector has shown an upward movement in prices to around $60-70 per tonne from $40 per tonne at the beginning of the financial year.
The rise in pet coke prices coupled with increase in diesel prices are likely to increase power, fuel and freight costs for companies. The higher input cost and lower demand is expected to limit the ability of cement manufacturers to pass on the higher prices to the end consumers, thus potentially squeezing margins.
India Ratings expects that post demonetisation, demand from the housing sector (which contributes around 65 percent cement demand) is likely to decline further.
The demand from individual home builders (which mainly consists of farmers) was expected to increase in FY17 due to a better monsoon. However, India Ratings expects that cash availability with individual home builders will also be limited post demonetisation.
India Ratings believes that the working capital cycle for cement companies is likely to increase (most cement companies are net working capital negative) due to the likely additional credit given to dealers, as most of dealers have shifted to digital payments.
(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.)
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