The lagged impact of the cash crunch and electoral polls will take a toll on cement production in Q4FY17, latest data shows cement volumes in February 2017 declined the most in over a decade by 15.8% yoy, says India Ratings and Research (India Ratings). Volumes have declined by 5% mom. India Ratings notes that the decline in cement growth is also on account of a high base last year; during January-March 2016 cement production grew by 9.2%, 13.5% and 11.9% yoy respectively. India Ratings estimates cement production to be muted in 4QFY17.
On the prices front, the wholesale price index of grey cement and slag cement has shown a softening trend through November 2016-Janaury 2017. Cement players got some respite on the cost front, with pet-coke and coal prices showing moderation in January and February 2017, after pet-coke prices almost doubled since March 2016.
Volumes of pan India cement players in 3QFY17 contracted by 5% yoy; while for central and north based players fell by 3% and 6% respectively. The southern region in contrast showed strong volume growth of 21%. Growth in the southern region is led by an increased in government expenditure in the state of Andhra Pradesh and Telangana.
India Ratings analysis of the financials of cement companies in 3QFY17 showed, pan-India player's median EBITDA per tonne declined marginally in 3QFY17 compared to 2QFY17; though remained comfortable at around INR975 per tonne; while median power and fuel and freight cost per tonne in 3QFY17 increased from 2QFY17 levels to INR977 and INR1,217 respectively. While the rest of India's players median EBITDA per tonne declined QoQ in 3QFY17 to INR878; while power and fuel and freight cost per tonne in 3QFY17 declined marginally to INR771 and INR867 respectively. India Ratings expects pan-India players' EBITDA per tonne to remain comfortable at around INR975-INR1,000; while players with a presence in rest of India's EBITDA per tonne to be around INR850-875 in FY18.
The credit profile, in terms of EBITDA interest coverage for pan-India players declined marginally in 3QFY17; however remained comfortable at around 11x; though rest of India cement players EBITDA interest coverage ratio was stable at around 2x at the end of 3QFY17.
On the policy front, due to the recent measures announced by the Ministry of Railways that require long term agreements/contracts for industries like cement, steel and fertilisers cement companies may see improvement in demand. As per the policy, the Ministry of Railways will provide a minimum guaranteed volume linked discount, on the basis of incremental growth in gross freight revenue, in return for a commitment to provide a minimum guaranteed quantity of traffic. The discounts will range from 1.5% to 35%, as per the incremental growth in gross freight revenue. India Ratings believes that these initiatives will increase the transport of cement through rail and cement manufacturers will be able to control freight cost more effectively. However, Ind-Ra notes that rake availability during peak season and railway network are likely to act as constraint to this policy.
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