India's cement sector may see consolidation due to weak demand, India Ratings said on Thursday.
Additionally, the rating agency expected heightened consolidation activity in South India, driven by the region's over capacity issues. The two acquisitions in the cement industry post January 2014 totaling $474 million are aligned to our expectation, the rating agency said in its report.
The genesis of the current bout of consolidation could be the Competition Commission of India's (CCI) in June 2012 order on 11 cement companies against coordinated supplier actions, it said.
The possible acquisition targets include cement companies or cement manufacturing facilities (which are part of over leveraged conglomerates) with cost-effective access to raw materials and energy or a locational advantage to optimise freight costs.
However, India Ratings believes facilities with limited viability due to a weak structural cost position will find few takers.
The agency expects low demand due to a continued weak economic activity and the upcoming elections to accelerate the consolidation activity in FY15. Cement production grew 2 per cent in 3QFY14 from 5.9 per cent in the second quarter of fiscal year 2013-14 (FY14).
The construction sector grew (major consumer of cement) 0.6 per cent in the third quarter of FY14 from 4.3 per cent in the previous quarter.
Growth for the cement industry for the fourth quarter of FY14 and the first quarter of the next fiscal year (FY15) is likely to be in the range of 2-3 per cent due to subdued demand. Also, profitability of integrated players and small players could come under pressure in FY15.
However, India Ratings drew some comfort from stable, low coal prices and steady exchange rates which will cushion margins.
The demand growth will be supported by an expected increase in demand from the rural sector and Tier II and Tier III cities, the agency said in its report.
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