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Cement sector set for consolidation: Crisil

BS Banking Bureau

Rating agency Crisil sees less greenfield cement projects in the future and expects fresh capacity to be added through de-bottlenecking exercises and a shift towards blended cement.

It considers the trend towards consolidation a positive development as it would improve the creditworthiness of corporates.

The slowdown in capacity demands in the sector would allow new capacities to be absorbed more smoothly as the natural growth in consumption would take care of the added volumes.

The abundance of limestone in cement clusters and their long lead distances would make the plants in these places, perennially vulnerable to capacity additions and to those capacities coming up outside their clusters were it not for phenomenon of consolidation.

Consolidation, according to Crisil, is positive because concentration of cement capacities among stronger cement companies would prevent 'short-term temptations from clouding long-term vision and also allow for improved operating conditions for the entire industry."

Also the financial strength of the stronger players will help rescue assets which are on the verge of or have become non-performing in the books of the financial institutions. An increase in the pace of consolidations and the resultant improvement in creditworthiness is likely to increase the investment grade credit.

There is an economic rationale for international companies to invest in domestic cement industry due to the strategic importance of the country and expected returns that the assets would generate over the long to medium term.

The entry into this sector is also easy as there are several cement companies, which are financially in a poor shape. The promoters of these companies are looking for an exit as they do not have ability to restructure or turnaround.

Domestic manufacturers, on the back of fears of foreign companies increasing their ownerships in Indian companies, are increasing their capacities as they fear they will be marginalised. As most of these companies are into expansions and acquisitions through debt, the credit profile of these companies have been significantly weakened.

As Indian companies are smaller than international cement majors, the threshold of supporting weaker companies is significantly lower than the foreign players.

This would necessitate that the Indian company which has acquired or expanded becomes profitable in a shorter time which, according to Crisil, may or may not be possible.

The factor of domestic manufacturers aggressively increasing size could be in the short to medium term the single largest driver of negative rating actions.

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