Even as infrastructure and affordable housing sectors are expected to drive demand for cement, the capacity utilisation is likely to be sub-70 per cent in the next financial year due to large capacity additions expected in 2019-20 and 2020-21, according to rating agencies.
According to rating agencies ICRA, India Ratings and Crisil, the demand for domestic cement is expected to be muted as against the decade's high growth of 13 per cent in the previous year.
"Incremental supplies are not fully integrated and most of it is backed by old limestone mining leases. Also, given that the grinding capacity addition is higher in relation to the clinker capacities for new units, the actual production from new capacities could be lower," ICRA Assistant Vice-President Anupama Reddy said.
The agencies have pegged the capacity utilisation below 70 per cent for 2020-21.
In the first nine months of FY20, the production at 247.4 million tonnes is marginally higher by 0.7 per cent as compared with the corresponding period of the previous financial year.
The production has been increasing on a month-on-month basis from September 2019. A double-digit growth of 11.8 per cent in cement demand was witnessed in December 2019 as compared to December 2018, said ICRA.
According to India Ratings, a continued oversupply coupled with below-70 per cent capacity utilisation is likely to limit the upside to profitability.
Also, the possibility of an increased realisation looks limited, after a healthy uptick in 2019-20 despite a demand slowdown.
Crisil's analysis shows that cement companies are set to report healthy operating profitability of 20 per cent next fiscal on an expected recovery in demand.
"Next fiscal, we anticipate volume growth recovering to 5-6 per cent from 0.5-1 per cent estimated for this fiscal. Demand growth in the infrastructure and affordable housing sectors on a lower base should support volume growth. These two sectors together contribute almost 35-40 per cent of cement demand in India," Crisil Research Director Hetal Gandhi said.
India Ratings expects the liquidity position of its rated cement companies to remain strong, led by the availability of significant cash balances, comfortable free cash flow generation and unutilised bank lines.
"The credit profiles of cement makers next fiscal should continue to mend. Net debt/Ebitda is set to improve to 1.7 times this fiscal from two times in fiscal 2019, and further to 1.6 times next fiscal driven by healthy operating profitability, moderate capex (capital expenditure) and strengthening balance sheets," Crisil Director Nitesh Jain said.
Ebitda is earnings before interest, tax, depreciation and amortisation.
The industry's annual capex is expected to be at Rs 9,000-11,000 crore in fiscal 2020-21 in line with the past trend, Crisil noted.
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