Ashish K Nainan, Research Analyst – Industry Research, CARE Ratings
Hope floats for cement industry. How do you see the growth prospects for the industry during the current year and in the next three years?
Two areas where we evidently see growth from for the cement industry is from housing and infrastructure. Two-thirds of the total cement demand comes from housing and the remaining from infrastructure and industrial. For the current year, we expect 5.5 to 6.5 per cent growth in cement production. We feel the current focus from the government is positive for the cement sector in particular.
Infrastructure offers a huge tap-able market for cement in India but is limited due to limited funding for these projects at the moment. On the other hand, housing in rural and urban markets are expected to witness steady demand on the back of higher disposable income and factors like good monsoons.What are the triggers/reasons for your views on the Industry’s growth prospects and how they are set to impact in your view?
Affordable housing: If one were to go by the bare-minimum market demand, affordable housing is a 8-10 billion sq ft opportunity. And this would form the backbone for cement demand over the next 2-3 years. Expect a 6-7 per cent growth in demand in the housing segment for cement. The segment contributes to 66 per cent of the total cement consumption. Additionally, the Government has set aside Rs 6,500 crore for affordable housing in the budget which will work like a stimulus.Infrastructure: Smart cities, metro, road, ports and airport projects, Cement deman d would witness higher growth of 8-10 per cent from this segment. National highways alone would contribute for 2-3 million tonnes of incremental demand for cement. Infrastructure development has been a key plank for the current Central Government and few key projects are nearing completion especially in the view of a nearing General Election.What are the changing dynamics of cost and profitability of the industry during the current year, from the present standpoint?
Two major factor affecting the costs would be:
Global coal and petcoke prices which are inputs as feed stoke. The same could impact the margins depending on how the prices of these commodities move in the international market. 45 per cent of the petcoke is imported whereas almost the entire coal is imported for the feedstock requirement. Fuel and power account for around 20-22 per cent of the costs of cement manufacturers.
The second biggest factor is diesel prices, which has spiked post the recovery in crude prices. Transportation of raw material and finished goods to consumers forms a major chunk (20-25 per cent) of the costs for cement companies. Profitability would be impacted, if the upward trajectory of these commodities continue.Pre-poll year is considered to be an infrastructure year. What are the infrastructure areas that may get boost going by last Budget?
The infrastructure categories expected to witness major build up are roads, public transport (metro in 12 cities, railways, ports, airports, etc.) and projects at smart cities. Rural roads and infrastructure would also witness considerable build-up.How the consolidation underway in the industry, and expansions coming on stream, are set to impact capacity utilisation during the year?
(Consolidation) Capacity utilisation is more of a regionally play. Central (72-74 per cent), Northern (65-67 per cent) and Western (73-75 per cent) with limited capacity addition in the immediate 2 years would continue with to witness healthy capacity utilisation. On the other hand, East (60-63 per cent) and South (55-57 per cent) would continue to witness pricing pressure especially since more capacity is expected to come online in these regions. From the current 65 per cent national capacity utilization level, we expect it to improve to 66-67 per cent during FY19. Consolidation may have a wider impact on pricing than capacity utilisation. We expect the prices to remain range bound or move lower.