Anoop Kumar Saxena, CEO - VICAT in India
How do you see the growth prospects for the industry during the current year and in the next three years? Have you seen any hints on growth, by now?
India has miles to go in terms of cement consumption and there is enough headroom for strong cement demand. Two strong reasons:
(i) Even after seven decades of independence, and nearly two-and-a-half decades of globalisation, India is one of the lowest per capita consumers of cement. Average consumption in India is just approximately 200 kg/year compared to 1,700 kg/year in China and 660 kg/year in Vietnam (comparable developing economy). The global average consumption is far ahead at 580 kg per year.
(ii) Although India is the second-largest producer of cement, there is disconnect between country’s GDP growth and cement output.
Prudent policy formulation and robust spending by the Government to create infrastructure & housing for all can drive floating hope into reality. Cement demand is expected to grow approximately 7 to 8 per cent YoY over the next 2-3 years. Currently, country’s cement production capacity is 441 MT and expected to increase to 467.3 MT by 2019 and likely to further increase to 484.1 MT by 2020-2021. Significant concentration of the cement capacities will continue to increase in southern and western regions largely due to bulk of limestone reserves in these regions. We expect cement demand to recover healthily from the impact of the government’s demonetisation policy and the early impact of GST implementation over the next couple of quarters.
Last quarter performance is indicating that rural housing and infrastructure demand is recovering strongly, although demand has not picked up in the real estate segment. Cement demand increased by 11 per cent and 18 per cent respectively in third and fourth quarter of 2017-18.
What are the triggers for your views on the Industry’s growth prospects and how they are set to impact demand in your view?
Rising urbanisation, an increasing number of households and higher employment are primarily driving the demand for housing, accounting for
60 per cent of total cement consumption.
• Initiatives undertaken by the government are expected to provide an impetus to construction activity in rural and semi-urban areas through large infrastructure and housing development projects, respectively.
• The affordable housing segment has been in focus with two major schemes providing a fillip to growth, including Pradhan Mantri Awas Yojana-Urban (PMAY-U) and Pradhan Mantri Awas Yojana-Gramin (PMAY-G).
What are the changing dynamics of cost and profitability of the industry during the current year, from the present standpoint?
Cost inflation (primarily energy cost) and low pricing power are key challenges of Industry during current year. The demand-supply balance drives cement pricing, like in any other commodities. Given that demand-supply gap will continue in the range of 100-140 MT for the next two to three years, overall capacity utilisation will hover 70-75 per cent. Hence, we believe that there will not be pricing power to drive the profitability, prices will go up and down during period with no significant improvement at all.
Input cost curve has continued to deteriorate due to higher diesel, petcoke and coal prices, as well as an increase in import duty of petcoke. It is very difficult for industry to pass the hike in input prices immediately as because consolidations by various players, the market share stabilisation would be key agenda which will not keep in driving price increase. Plant efficiency, logistics efficiency and mitigate the risk of increasing cost of fuel and other raw material to maintain the profitability.
How do you see the three segments of cement demand – residential, infrastructure and industrial construction – are set to boost/impact cement demand this year?
Housing: (55 per cent) sector is expected to grow by 5-6 % mainly due to following reason:
• Housing for all (High Impact): Govt. plans to build 20 million units for economically weaker section by 2002.
• Several Housing Projects planned by Government for rural segment like PMAY. Also focus on urban sector
Industrial commercial sector is expected to grow by 5-6 per cent mainly due to following reason: Currently weak investment from this segment. But expected to pickup on the back of key policy such as Make in India, etc.
Infrastructure (25 per cent) sector is expected to grow by 10.5 to 12.5 per cent mainly due to following reasons:
Roads & highways (high impact): Investment to increase by 1.8x in five years to Rs 9.8 trillion. Other projects like Bharatmala investment ($16 billion) to drive growth.
Railway (high impact): $134 billion earmarked by RailMin towards sector development through 2019. Further eight corridors ($12-13 billion), several metro projects to drive the demand, metro rail projects, irrigation project in Andhra Pradesh and Telangana, Navi Mumbai Airport Project.
Housing is by far the biggest contributor to cement demand. Do you see any major recovery on the sector during the reminder of the year with the government’s thrust to ‘Housing for All’ scheme?
Housing accounts for 60 per cent of total demand and rest is accounted by commercial and industrial establishments. Currently, housing demand is not following traditional pattern of market share of total demand and trend shows that demand in this sector has slowed down. However, initiatives undertaken by the government are expected to provide an impetus to construction activity in rural and semi-urban areas through large infrastructure and housing development projects, respectively. Housing for all schemes are largely driven by two major scheme; PMAY-U and PMAY-G and this can drive the recovery of cement demand in housing sector.
Pre-poll year is considered to be an infra year. What are the infrastructure areas that may get boost going by last Budget?
We expect demand growth to gain momentum in FY19 because of a relatively steady base and parliamentary elections leading to announcement of new infrastructure projects and the rush for completion of existing projects to showcase them during the elections.
What is the demand growth do you foresee for the year in the geographies of your operations and what are triggers?
The southern region will continue to add capacity, although the pace of new addition is likely to taper at approximately 2.4 per cent CAGR over FY16-FY20E. However, with a strong base we expect the demand-supply gap to be significant for any real strong pricing momentum despite the recent strong pick up in the demand. Strong demand revival from the region driven by twin state development of Andhra Pradesh and Telangana since 3QFY18 will keep the demand momentum continuing. However, Shree Cement entry in south India will make south India market more competitive.
How the consolidation underway in the industry and expansions coming on stream are set to impact capacity utilisation of the industry during the year?
India’s cement industry is fragmented. About 55-60 per cent market share is controlled by large players and consolidation in cement sector has not significantly changed the share of large players as in the past few years, most of deals are signed between large players. New and mid-size players are likely to lead the consolidation in order to secure market share quickly and get exposure to the desired regions.
QoQ margin for south Indian cement will reduce due to subdued pricing in January-March 2018 and an increase in cost pressure. Higher proportion of sales to infrastructure projects could further dent realisations.