Note ban woes: Cement sector growth estimate cut to 3-3.5%

NEW DELHI: India Ratings and Research (Ind-ra) has revised downwards growth estimates for the cement sector to 3-3.5 per cent from 4-6 per cent for 2016-17 citing “a blip in demand due to demonetisation”. The ratings agency, however, said the credit profile of cement manufacturers is expected to remain stable due to stable operating profitability and absence of debt-led capex.

“Ind-ra has revised down its FY17 growth estimates to 3-3.5 per cent from 4-6 per cent earlier (for the cement sector). This revision is largely attributed to a blip in demand due to demonetisation,” it said in a statement. The agency also revised downwards the panindia capacity utilisation for the sector to 65 per cent from 69-70 per cent earlier “due to the weak demand outlook in 2H FY17 on account of demonetisation”.

The utilisation had remained stable in FY16 at around 70 per cent. “Ind-ra does not expect capacity utilisation to improve significantly in FY18. It is likely to remain around 70 per cent during FY18,” it added.

The rating agency, however, said the cement industry is likely to grow 4-5 per cent yearon-year in FY18, driven largely by “demand stemming from infrastructure activities and a revival in housing demand in rural areas, both led by govern- ment spending”. Ind-ra said it “believes that a 38 per cent and 23 per cent increase in the allocation of funds towards the housing sector under Pradhan Mantri Awas Yojna and spending of the Ministry of Road Transport and Highways to Rs 290 billion and Rs 649 billion, respectively, would increase cement demand in FY18”.

The agency expects credit profile of cement manufacturers to remain stable on steady operating profitability and absence of debt-led capex. It said a stable demand could enable cement manufacturers to pass on increase in cost during FY18 to customers.

The sector has witnessed rising input costs such as prices of pet coke and coal, which have almost doubled since September 2016, while the current increase in crude oil prices are also likely to lead to an increase in diesel prices, it added. With regard to housing demand, the agency said it does not expect any significant turnaround in demand in the near term. However, a higher-than-expected demand or significant progress by the government on housing schemes could result in a better cement demand and thus in a positive sector outlook, Indra said.

Meanwhile, the government plans to come up with a series of pilot projects in areas like coal gasification and coalto-polychemicals next fiscal, a top official said on Tuesday. Once the projects are successful, government will push for commercial use of technology for utilisation of country’s huge coal reserves, Coal Secretary Susheel Kumar said. “We want to do at least one (pilot) project on Underground Coal Gasification and not only on a project scale or 5-6 mw .... Beyond that, we want commercial production also if it is possible,” Kumar said.