On the Growth Path

The cement industry is likely to be driven by growth in rural demand and a pick-up in the infrastructure sector during FY2017, says an ICRA report.

ICRA, a professional investment and credit rating agency, expects the cement demand growth, which was relatively muted at 5 per cent in FY2016, to pick up to 6 per cent in FY2017 and further to 7 per cent in FY2018.

Demand growth during FY2017 is likely to be driven by the pick-up in the infrastructure segment, primarily road projects and the housing segment during the next one year; this apart, there is a likelihood of a recovery in the rural demand from H2 FY2017, given expectations of a better monsoon.

Further, in the southern markets, the demand is also likely to be supported by the construction of a new capital for Andhra Pradesh and the focus on irrigation and water grid schemes by Telangana.

With the pace of new capacity addition slowing down, ICRA expects to show an improvement especially in FY2018, which should support cement prices and profitability indicators for cement manufacturers.

Cement demand during Q4 FY2016 witnessed a rebound driven by a pick-up in the infrastructure segment owing to government spending.

ICRA estimates the utilisation at 70 per cent in FY2016, and given the capacity overhang, the capacity utilisation is likely to remain moderate at 71 per cent in FY2017 but it is expected to improve to 75 per cent in FY2018, driven both by the pick-up in demand as well as the slowdown in new capacity addition.

The eastern region will lead the capacity expansion, while the southern region, which had witnessed the highest capacity addition in the last five years, will see a considerable slowdown in capacity addition during this period.

Improvement in the capacity utilisation in the north, west and east is likely to support the cement prices in these regions in the near term. While the demand is expected to improve in the south, the capacity utilisation is likely to remain lower. Thus, pricing discipline will remain critical for the profitability of the mills in the south in the near term. On an all-India basis, the profitability and debt protection metrics are likely to show a moderate improvement in FY2017.

The ICRA study on select cement companies shows that most cement companies in the sample in the study have reported either a decline or a modest year-on-year (y-o-y) increase in revenues in FY2016. Only two companies, namely OCL India Limited and JK Lakshmi Cement Limited, registered a double-digit y-o-y revenue growth due to volumetric growth aided by capacity expansion.

The profitability margins of most cement companies declined or reported moderate increase on a y-o-y basis (except for south-based companies) during FY2016 when compared to FY2015.

Overall lower cement prices in the northern and western regions during FY2016, coupled with an increase in raw material and freight costs, have impacted the operating profitability of the mills located in these regions.

While the debt coverage metrics for the north-based companies declined on a y-o-y basis in FY2016, the same has improved substantially for the south-based companies.