India's top cement makers are slated to undertake capital expenditure worth Rs 1.25 trillion over the next two financial years (2025-26 and 2026-27) to add 130 million tonne capacity. This significant capex plan is driven by healthy demand outlook and quest for higher market share. But this aggressive investment will not weaken their balance sheets and thus may not impact their credit profiles.
The projected outlay will be 1.8x of the capex during the past three fiscals, yet the credit risk profiles of manufacturers will remain stable, Crisil Ratings said in a note on Thursday.
The sector's credit profile is stable because of their continued low capex intensity and solid balance sheets with financial leverage sustaining below 1x on the back of strong profitability.
Crisil Ratings' analysis is based on 20 cement makers who account for over 80 percent of the industry’s installed grinding capacity as of March 2024, the rating agency said.
A healthy 10 per cent annualised increase in cement demand in the past three fiscals has outpaced capacity addition growth, pushing utilisation level to a decadal high of 70 per cent in fiscal 2024 that prompted the manufacturers to press the capex pedal.
According to Manish Gupta, a Senior Director at Crisil, demand outlook remains healthy with a compounded annual growth rate of 7 per cent over fiscals 2025-29. The surge in capex over the next three fiscals will primarily cater to this growing demand as well as to cement-makers’ aspirations to improve their national presence.
A total of 130 million tonne of cement grinding capacity (nearly a fourth of the existing capacity) is likely to be added by players over this period, he added.
Yet the credit profiles of these companies will remain stable as capex intensity of the industry is still low and likely to remain range-bound at 0.7-0.9x during fiscal 2025-27 or similar to that in the past three fiscals, owing to the sustenance of healthy operating profitability and ramp-up of newly commissioned facilities.
According to Ankit Kedia, Director, Crisil, the low capex intensity will keep the balance sheets of manufacturers strong and ensure stable credit profiles.
Over 80 per cent of the projected capex is likely to be funded through operating cash flows, resulting in minimal debt creation. Moreover, existing cash and liquid investments of over Rs 40,000 crore will provide a cushion in case of implementation-related delays, he said.
Accordingly, financial leverage, as measured by net debt to operating profit, is projected to remain strong below 0.8x in fiscal 2027, similar to the fiscal 2024 level.