Indian cement industry hit a slowdown in the beginning of this year as cement production was down by 0.5 per cent in the Jan-March 2015 period. Cement price also came under pressure due to weak demand.

Due to weak demand from end-user segment, the nationwide cement demand remained sluggish. Cement price also came under pressure due top the weak demand.

Cement demand remains subdued due to weak demand from end user indusries Cement demand has remained sluggish in Q4 FY15 which is traditionally a seasonally strong quarter for the cement industry. All-India cement production declined by 0.5% YoY during Jan-Mar 2015 as against an increase of 9.7% during Apr-Sept 2014. While pre-election spending and delayed monsoon had supported the growth in cement demand in H1 FY15, the growth slowed down in H2 FY15 once the election cycle was over. Cement demand was also impacted by cut down in government spending in Q4 FY15, muted demand from real estate and construction projects and slow recovery in infrastructure spending. Further, decline in kharif crops production owing to poor monsoons affected agricultural incomes and post-monsoon rural demand for cement for housing and other purposes. Regional factors such as extension of monsoon in South, extremely cold weather in North India and unseasonal rains in North in Q4 FY15 also affected construction activities and consequently cement demand in some areas. The demand has showed no signs of recovery in April 2015 with cement production declining by 2.4% YoY during the month.

Significant slowdown in fresh capacity addition in FY17 to aid improvement in capacity utilisation
The industry has seen slowdown in addition of new capacities due to supply glut faced in recent times. For instance, between FY11-FY15, the industry added 92 MTPA cement capacities as against 122 MTPA in the preceding 4-year period FY07-FY11. However, slowdown in demand (cement production grew by 6.0% during FY11-FY15 as against 7.6% during FY07-FY11) resulted in decline in capacity utilization from 77% in FY12 to 72% in FY14 despite slowdown in fresh capacity addition. Going forward, we expect the industry to add 28 MTPA capacities during FY16-FY17- 21 MTPA in FY16 and 8 MTPA in FY17 as against the peak addition of 50 MTPA in FY10. Eastern region will lead the capacity expansion and is expected to witness about 12 MTPA capacity additions during FY16-FY17.

Southern region, which had witnessed the highest capacity addition in the last five years, will see a considerable slowdown adding only 6 MTPA of capacity addition in the next 2 years. Assuming a demand growth of 7% over the next two years, the incremental demand will be 19-20 MTPA, which will just match the incremental supply in FY16 resulting in stable capacity utilization vis-a-vis previous year. However, with slowdown in new project execution in FY17, the all-India cement capacity utilisation is likely to improve to 75% in FY17.

Prices come under pressure due to weak demand1

• North: Cement companies in North raised prices by Rs. 20/bag in Jan 2015 ahead of the busy season in anticipation of recovery in demand. However, they were unable to sustain these hikes due to weak demand and unseasonal rains. For example, average wholesale cement prices in Chandigarh increased from Rs. 264/bag in Dec 2014 to Rs. 285/bag in Jan 2015 but declined to Rs. 276/bag in Feb 2015 due to subdued demand. Cement companies again raised prices by Rs. 10-15/bag in the month of Mar 2015 but prices corrected by Rs. 20/bag in May 2015. Cement prices in North have slid below last year?s prices.
• West: Western region, particularly Maharashtra has seen a steep decline in prices. Average wholesale prices in Mumbai have declined to Rs. 285/bag from their peak level of Rs. 364/bag in Jan 2015. Prices in Ahmedabad have also declined by Rs. 15-20.bag due to weak demand.
• East: The average wholesale prices in Kolkata market remained in the range of Rs. 340-360/ bag during FY15 and have increased to Rs. 363/bag in May 2015.
• South: Cement companies took a major price hike in Dec 2014 to pass on the rising costs. For example, in the Hyderabad market, cement prices rose sharply by Rs. 60/bag MoM to Rs. 350/bag in Jan 2015. While there has been some disruption in pricing discipline in May 2015, the prices continue to be significantly higher on a YoY basis.

Q4 FY15 revenue growth remains modest due to weak demand; South based companies report healthy profitability in Q4 FY15
Most cement companies in ICRA Sample2 reported either a decline or a modest YoY increase in revenues in Q4 FY15. Only two companies, namely OCL India Limited and JK Cement Limited registered a double-digit YoY revenue growth due to volumetric growth aided by capacity expansion. The revenues of companies in ICRA sample registered mere 0.6% YoY growth. On a sequential basis, all companies reported an increase in revenues with revenues for ICRA Sample increasing by 9.0% QoQ in Q4 FY15.

The profitability margins of most cement companies declined on a YoY basis (except for South based companies). Despite this, the operating margins of ICRA Sample increased by 100 basis points to 19.2% n Q4 FY15 driven by performance of South based cement companies as well as ACC Limited. The operating profitability margins of South based companies namely, The Ramco Cements Limited and The India Cements Limited improved significantly both on a sequential and YoY basis due to significant hike in cement prices in South in Dec 2014. Cement companies in North had witnessed healthy profitability margins in Q4 FY14 driven by shutdown of 6MTPA capacity of Binani cement Limited and subsequent increase in cement prices in the region. As a result, on a YoY basis, the profitability margins in North (JK Cement Limited, JK Lakshmi Cement Limited, shree Cement Limited) came under pressure in Q4 FY15.

1Source for region-wise price data: CMIE
2ICRA Sample Includes ACC Limited, Ambuja Cements Limited, OCL India Limited, Shree Cement Limited, Ultratech cement Limited, JK Cement Limited, JK Lakshmi Cement Limited, Prism Cement Limited, the India Cements Limited, The Ramco Cements Limited

By Sabyasachi Majumdar, Sr.VP, Co-head, Corporate Sector Ratings, ICRA Ltd