Consolidation, strong demand to ease stress in cement sector

Favourable demand and consolidation in the cement industry are expected to bring down the stressed advances ratio from the current 14.2 per cent, as banks put more bad debts on the block.

The outstanding credit to the sector is pegged at ₹55,348 crore. The stressed advances peaked to 35 per cent in FY17, according to Care Rating.

The sector has witnessed consolidation with large cement makers taking over regional heavyweights, and struggling companies being taken over through competitive bidding, under the Insolvency and Bankruptcy Code (IBC).

UltraTech Cement is one of the major beneficiaries of the stressed asset buying. It bought over 22 million tonne per annum capacity of Jaypee Cement and acquired Binani Cement’s 12 mtpa through an IBC-driven insolvency process.

Detergent maker Nirma acquired 13 mtpa of Lafarge India assets, while Birla Corporation took over 5.5 mtpa capacity of Reliance Cement capacity.

Companies are consolidating and expanding to improve their market shares in existing products and to enter new product segments.

It not only cuts costs, but eases the process of not having to set-up a new plant and arrange for approvals and rights, thus saving on valuable time, said Care Ratings.

The acquisition of existing cement assets is a cost-effective way for the existing players to expand into newer markets, it added. Cement companies have added fresh capacity of 25 mtpa last fiscal, putting pressure on capacity utilisation, which has stablished at 70 per cent. The production capacity of the industry has increased to 480 mtpa last fiscal from 328 mtpa logged in FY12.

Growth prospects

Last fiscal, the industry registered the highest-ever production growth of 13 per cent in the last decade. The output was up at 337 mt last fiscal against 298 mt in the same period the previous year.

The rating agency expects cement production to remain steady with growth of 5-7 per cent this fiscal. While prices may remain stable, a revival in retail demand is expected to push up prices, it said.

Increased government spending and incentives to housing, especially in the affordable segment, should lead to steady growth rate in the sector from this fiscal, it added.