Cement demand is expected to grow at a slower pace of 7-8 per cent on-year to approximately 475 million tonne (MT) this fiscal, after clocking a compound annual growth rate of around 11 per cent between fiscals 2022 and 2024, stated a report by CRISIL Ratings. However, it added, the operating profitability of cement players is likely to sustain at Rs 975-1,000 per tonne, above the decadal average of Rs 963 per tonne. This, coupled with strong balance sheets, will keep credit profiles stable.
CRISIL Ratings analysed 18 cement makers, which account for over 85 per cent of domestic sales volume, to reach these conclusions.
During the first quarter of this fiscal, India’s cement demand grew only by around 3 per cent, owing to an extended heatwave and shortage of labour during general elections. It is estimated to have grown at a similar pace in the second quarter as well owing to seasonal weakness, CRISIL said while adding that the second half is likely to bode well for the sector.
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Further, growth in the housing segment is likely to see a revival in rural housing demand supported by the healthy monsoon this year. Housing segment accounts for 55-60 per cent of cement demand. Similarly, government spending on infrastructure development, which accounts for around 30 per cent of cement demand, will support demand too. On a high base, total allocation to six core cement-related infrastructure sectors in the Union Budget has increased 6 per cent for this fiscal, with the overall quantum of capital expenditure (capex) remaining reasonably high. Though actual spending was sluggish until July, the government’s capex is likely to accelerate from the third quarter of this fiscal which will boost cement demand from the infrastructure segment.
Sehul Bhatt, Director- Research, CRISIL Market Intelligence and Analytics, said, “Cement demand is expected to rebound in the second half of this fiscal (which typically accounts for more than half of the annual sales), as construction activity gathers pace across infrastructure and housing segments post-monsoon. Healthy monsoon, improved labour availability after the festive season, and pick-up in government spending on infrastructure and housing (under the Pradhan Mantri Awas Yojana) should drive demand up 9-11 per cent in the second half, taking the annual growth tally to 7-8 per cent.”
Following persistent demand, CRISIL said, operating profitability of cement makers is likely to remain steady, despite a sharp decline of approximately 6 per cent on-year in cement prices in the first half of this fiscal.
Ankit Kedia, Director, CRISIL Ratings, said, “Power and fuel cost (~30 per cent of total production cost) could decrease Rs 135-145 per tonne this fiscal as average coal/ pet coke prices have declined and are currently stable. Operating leverage benefit of ~Rs 30 per tonne is also expected as volume growth has been in sync with the pace of capacity addition thereby keeping the utilisation levels strong. This will offset marginal increase in the raw material prices and will keep the operating profitability of cement makers range bound at Rs 975-1,000 per tonne this fiscal. This expectation factors some pull-back in cement prices during the second half of the fiscal as demand revives.”
With steady profitability and projected volume growth, cash accruals are expected to remain healthy. The report stated that the financial leverage of individual players is expected to remain within a narrow range (
That said, per CRISIL, subdued construction activity or lower infrastructure-related spending could dampen the outlook on cement demand. Any adverse movement in commodity and energy prices (stemming from geopolitical developments) or inability of cement players to increase prices could impact profitability expectations and will bear watching, it added.
From: financialexpress
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