? An analysis of the impact of the ongoing liquidity crunch on the
India cement sector shows that most companies appear to be
comfortably placed in terms of liquidity.
? Most cement players do not have high amounts of leverage, and a
large proportion of existing loans are fixed rate debts. Floating
rates on working capital loans have increased by 250-300 bp, but
have yet to have a meaningful impact on borrowing costs –
although this could change, particularly during 4Q FY09.
? Expansion projects which are in the early stages of
implementation could be delayed or shelved altogether if liquidity
remains tight. We believe that this should positively impact the
industry as it will limit the degree of oversupply in FY10 and FY11.
? We do not see any of the projects planned over the next two-three
years by coverage companies being scrapped, although some
delays are likely. India Cements, Grasim and Ultratech appear
strongly placed given the high visibility on their expansion plans.
Valuations remain attractive; maintain OVERWEIGHT.
Liquidity not an issue for the sector… yet
Most cement manufacturers appear to be relatively comfortably
placed in terms of liquidity – the favourable demand-supply balance in
recent years has led to strong cash generation for most companies,
thereby reducing their borrowing requirements despite large capex.
The companies we spoke to indicated that a large proportion of their
debt is currently at fixed rates, and they have therefore not seen any
large impact on financing costs. However, these companies have
reported that interest rates on floating rate borrowings (largely on
working capital loans) have risen to the tune of 250-300 bp over the
past three months, and they are therefore avoiding drawing against
these limits as far as is possible.
Owing to the seasonal nature of the cement demand, companies
report that they are still to see any real pressure on working capital
requirement, given the lower levels of business activity during
monsoon. However, the January-March quarter, which traditionally
sees the strongest sales by cement companies (and increased
working capital requirements as a result), could lead to some strain on
borrowing costs for cement manufacturers if the liquidity situation
remains tight – and companies are now looking to insulate themselves
against such an eventuality by securing additional sanctioned limits.
We believe that it is highly unlikely that loan covenants for these
companies will be breached, given their low gearing and strong
interest coverage positions, as well as positive free cash flows.

Expansion plans could be put on hold going forward
The capacity expansion initiatives of cement companies, however, are
a different story. While we believe that new capacities which are in
advanced stages of implementation (i.e., projects with a large
proportion of the capital expenditure already done and where civil
works have begun) are likely to be completed, we expect projects
which are still in the early stages of planning to be deferred or shelved
altogether due to liquidity constraints going forward.
Impact on the competitive environment
We believe that delays in capacity additions are likely to lead to a
lower degree of oversupply in the industry than the market is currently
expecting, and the resultant fall in cement prices is also likely to be
lower. Our estimates currently factor in an 11% drop in cement prices
from current levels up to FY11E, versus a 18.5% drop during
December 2000 to September 202.
The (relative) winners and losers in our coverage
Given lower visibility on future capacities, we believe the likely winners
in our coverage are India Cements, Grasim and Ultratech – as
capacity expansions for these companies are all nearing completion
and are unlikely to require any further large outlays of cash going
forward, thus lending comfort to our estimates. We are more cautious
on the expansion plans for ACC and Ambuja, which are expected to
be spread over 2009 and 2010, although the strong cash positions of
these companies should ensure completion of projects.
Overall, we remain positive on the prospects for the India Cement
sector as valuations remain attractive. We believe the sector could be
a strong defensive play in the current environment, given the strong
liquidity positions of most companies. India Cements, Grasim and
Ultratech remain our top picks.

-Contributed by a blogger