The sharp decline in demand in FY2021 will delay capacity addition and impact profitability in the cement sector in the medium-term, warns a CRISIL report.

The economic woes caused by the ongoing COVID-19 pandemic are likely to result in a marked decline in demand for cement in the current financial year, a report has warned.

The report, Cement Cracks, by CRISIL has warned of a 10-15 decline in the demand for cement in 2020-21 fiscal owing to the rollout of the nationwide lockdown and other social distancing measures. Demand is likely to slowly start picking up traction from 2H2021.

"On a quarterly basis, cement demand would be a washout in the first quarter of this fiscal, given lockdown measures across India that would hurt construction. Demand will pick up only from the second half of this fiscal," Isha Chaudhary and Koustav Mazumdar said in their April 8 report.

The analysts further added that complete recovery would take longer due to lower Capex by government, given diversion of funds towards health and public welfare, weakened demand for real estate and private individual houses and buildings (IHB) and a lower spend under Pradhan Mantri Awas Yojana (PMAY-Urban) given the impact on incomes. Presently, government-backed projects account for 35-40 per cent of the demand for the commodity.

However, projects in rural housing, PMAY (Rural), Pradhan Mantri Gram Sadak Yojana (PMGSY), and spend on key infrastructure projects will start to provide some relief to the sector from the second half of the year.

"Washout in the first quarter, followed by continued mildness through the seasonally weak second quarter, will weigh on the sector’s growth, leading to a first-ever demand contraction of this proportion for it this fiscal," the report stated.

"Contracting demand growth will push the sector’s utilisation level down further to 56-58 per cent, adding to the pain from the weakening seen in fiscal 2020, when incremental supply exceeded demand by 27 million tonnes (MT)," it added.

CAPACITY EXPANSION, PROFITABILITY TO BE IMPACTED
The demand shock owing to the disruption caused by COVID-19 pandemic and the ongoing nationwide efforts towards its containment is expected to affect the capacity addition plans of the industry, and stall or delay projects in the medium-term.

Despite weak demand, the cement industry had registered a decent price increase of Rs 25 per bag in FY2020 owing largely to consolidation in the regional markets by bigger players. This and lower commodity prices are likely to drive margins at cement companies to a seven-year high during the fiscal.

However, the study anticipates the price increase to reverse as players struggle on the demand front. The decline would be limited to 1-2 per cent (or Rs 5-10 per bag) as players exhibit pricing discipline, with realisations declining 2-3 per cent as the share of non-trade is likely to increase.

"Profitability, on its part, is expected to be under pressure after some expansion last fiscal. The impact of demand freefall, though, will be limited by lower input prices, the report said.

Because of directions on social distancing issued by the centre and state governments to prevent infections, leading cement manufacturers like ACC, India Cements, Ramco Cement, Ultra Tech Cement and Dalmia Cement (Bharat) temporarily suspended cement production across their plants in late March.

– Manish Pant