Indian cement companies in for a cash squeeze

Threat of lower profits may cause a liquidity scare, warns Fitch.

As a whole, the Indian cement sector faces a difficult year ahead given the low demand for private construction and a possible slowdown of government infrastructure spending.

"Fitch Ratings says that the 2012 outlook for the Indian cement sector is negative, driven by a cyclical moderation in demand and structural overcapacity in the industry. Cement volumes are largely the result of real estate construction and infrastructure projects. Fitch expects future activity in both these sectors to remain muted given low real credit growth, leading to cement dispatch volume growth to range from 2% to 5% in 2012," Fitch said in its 2012 outlook report on Indian cement firms.

"Cement volumes had been relatively stable till early 2011 as such a slowdown in construction activity (driven by private sector) has been offset by governmental spending in infrastructure. However, a rise in interest rates moderated the growth in the real estate construction to 18.7% in November 2011, while a weakening of government finances may adversely impact infrastructure spending in 2012," it added.

"Fitch expects most cement companies to experience pressure on margins in the financial year to end-March 2012 (FY12) and the medium term due to the rising operating costs, which, due to the expected muted demand, have not been passed onto customers. Operating costs, particularly the cost of power and coal, have increased due to a rise in the cost of international coal. Freight costs have also increased as railways raised freight rates by almost 6% in 2011," it said further.

"Cement companies are expected to generate lower cash flows in 2012 than in the previous year due to lower profitability, and thus to face liquidity pressure, possibly leading to higher working capital requirements. Fitch notes that credit profiles of large companies are likely to remain stable due to their strong balance sheets and moderate capex plans. Small- and mid-sized cement companies with high debt-driven capex and limited flexibility in cost structures may have a deterioration of debt coverage," it ended.