Cement Industry contracts first time in 12 years

Brief: Cement Industry contracts first time in 12 years; Poor performance of construction sector has a major impact; SMERA expects profit margin of the industry to be negative in Q4 and remain bearish well into FY18

Impact: Negative

Indian cement industry continues its negative growth, by recording a contraction of (-) 6.8% in March 2017. Until recently, Cement was one of the best performing industries among the core sectors – however, Q3 onwards, as the impact of demonetization unfolded, things changed for the worse. Ongoing consolidations have limited scope for capacity augmentations and capacities already created are severely underutilized in some cases. Post demonetization, this sector has contracted by nearly (-) 9%. Overall, as a result of the poor performance in the last two quarters, the annual growth of the industry has contracted by (-) 1.3% in FY17 as against an expansion of 5% in FY16. For the record, the industry has contracted for the first time in the past 12 years.

On the other hand, consumption has expanded by just 1.2% in FY17 (Apr-Jan) as against 3.3% during the said period in the previous year. The construction sector that consumes nearly 93% of overall production of the cement industry has been severely impacted by demonetization and this has dampened performance. Moreover, the real estate companies are reeling under the implementation of the Real Estate Regulating Act (RERA), which is announced in last budget. With the implementation of RERA, freedom of real estate companies’ on project completion will be curbed and overall increased obligations may have a debilitating effect on several small and median sized companies.

With the continuation of a mild demand, the price of cement has also dropped in various regions in FY17. As a result, profit margins of the industry has dropped from 7% in Q1 FY17 to 0.9% in Q3, FY17. SMERA expects that profit margins would be negative in Q4 and may continue their bearish trend well into FY18.

Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

Now is the time to re-emphasize our increasing footprint across all segments of ratings through the launch of our new name - 'Acuité'.

The name has changed. The spirit of upholding highest standards of analytical rigour, continuous improvement, excellence in our processes and quest for innovation remains the same. We would like to re-emphasize that we will continue to work hard to provide independent, unbiased and timely opinion of highest standard.

Acuité means 'sharpness and clarity of thought and vision'. Let our research and ratings help you take decisions with confidence.

Sankar Chakraborti