A bricklayer puts cement on bricks at a residential construction site. (Photographer: Simon Dawson/Bloomberg)

How Liquidity Squeeze For NBFCs May Hit Cementmakers

Liquidity concerns around non-banking lenders may add to the woes of the cementmakers, which are already grappling with a supply glut, higher costs, underutilised capacities and a low pricing power, analysts said.

Housing finance companies had been lending to riskier segments, including buyers of low-cost homes, Harsh Vardhan from the Centre of Financial Services at SP Jain Institute of Management & Research wrote in a BloombergQuint Opinion column. That came when public sector banks and some of their large private peers had become averse to such lending due to rising bad loans, he wrote.

After the defaults by Infrastructure Leasing & Financial Services’ group companies, analysts fear borrowing costs could rise for mortgage lenders. That could hurt demand for real estate and cement.

“The already troubled realty sector is set for an extension of its woes as fund flows from beleaguered NBFCs dry up. Affordable housing, too, will not be spared,” Vinit Bolinjkar, head of research at Ventura Securities, said. A slowdown in the realty business, he said, will impact construction activities, lowering cement sales.

  • Shree Cement has seen a significant rise in its enterprise value and capacity.

Financial services provider Investec agreed. Growth in demand for cement hinges on the revival of the housing segment, it said. With the current slowdown in NBFC credit growth, the brokerage said, concerns remain around cement demand.

That comes when valuations of cementmakers are at a three-year low, which underscores the sluggishness in demand. Increasing costs, excess supply and capacity addition when the rupee weakened and interest rates rose kept the valuations lower, according to Bolinjkar of Ventura Securities.

Why Valuations Remain Lower

Supply Glut

About 65-million-tonne capacity additions are expected to commission by 2020-21, according to a report by Investec. The cement capacity, the brokerage said, is expected to touch 479 million tonnes by March 2019 against a domestic demand of 315 million tonnes.

Cost Pressures:

Prices of pet coke, a key raw material, rose nearly 20 percent year-on-year to $125 a tonne, according to Kotak Institutional Equities. This impacts the operating performance of cementmakers as domestic companies continue to depend on pet coke imports.

Weaker Rupee

A weaker rupee adds to the cost pressures for cementmakers as imported coke and diesel prices rise.

Outlook On The Industry

Investsec maintains an ‘Underweight’ on the cement industry and expects demand to slow down compared with a 6.5 percent growth in the previous financial year.

The growth rate, according to the brokerage, will be lower as demand in two years after assembly elections is less than a year before polls and the year of election. “With 19 states, representing nearly 50 percent of India’s cement demand, due for elections over FY19-20, we see declining growth trends.”

Yet, Morgan Stanley expects strong earnings growth for the industry on rising cost inflation, growing utilisation levels and renewed pricing power.

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Also read: Cementmakers See Recovery Only By Next Year