HomePress ReleaseDNA: Infrastructure spending spurs cement sector revival

DNA: Infrastructure spending spurs cement sector revival

Investment in infrastructure by states as well as the Centre coupled with boost for the low-cost housing assets have triggered a revival in demand for cement since the start of the second half of the previous financial year and the tempo is expected to continue this year as well.

“Demand is largely driven by social sector investments being made in several states with rural infrastructure as well as low-cost housing triggering demand for cement. Demand is now growing at 5-7% and the trend is expected to continue this year as well,” says B K Singh, senior executive director, marketing at Dalmia Bharat Group.

The domestic cement production rose 6.3% at 298 million tonne (MT) in FY18, as compared to 280 MT in FY17. Most of this growth was registered during the second half of 2017-18 and was largely driven by a revival in demand in key markets.

 

Rating agency Icra expects the growth momentum to continue in 2018-19 as well, with industry likely to report 6% growth.

“We expect demand in FY2019 to be driven by a pick-up in the affordable and rural housing segments and infrastructure, primarily road and irrigation projects. The budget of FY2019 also supports higher rural credit, increased minimum support price, increased allocation for the rural, agricultural and allied sectors, along with continued focus on the Pradhan Mantri Awas Yojana and infrastructure investments. Cement demand from rural housing will see a pick-up post monsoons, following an improvement in the rural economy,” says Sabyasachi Majumdar, senior vice president & group head, Icra.

Investments are more pronounced in several eastern states of West Bengal, Jharkhand and also Bihar where demand is consistently growing by 15%.

In Andhra Pradesh and Telangana, demand is led by the state-sponsored irrigation and low-cost housing projects, while in some parts of the western region there was renewed thrust on infrastructure.

Rising demand is well reflected in the capacity utilisation of cement makers, which is about 90% for most of the players active in east as well as west, while excess capacity in the southern region has inhibited the industry’s average capacity utilisation which is now at around 70%, according to Indrajit Chatterji, executive director, sales and marketing for the eastern region in Dalmia Bharat Cement.

“A lot of investments are being done in most of the eastern states triggering demand for cement which has been growing consistently at around 15% for us while in the mature markets the demand has been growing at 5-7% and the trend is expected to continue this year as well, said Singh of Dalmia Bharat.

Plants in southern region would remain under stress as they would continue to face risks of volatile cement prices, given the oversupply situation in the region. The situation is expected to only get worse because of the expected capacity additions in the southern region between FY19-FY21, according to India Ratings.

Higher budget outlay on infrastructure and construction with projects like BharatMala project entailing investment of Rs 7 trillion in the next five years, government’s urban low-cost housing scheme where 3.2 million units have been approved over three years and construction started for 1.4 million units along with Smart Cities Mission are the key factors supporting demand, Neeraj Akhoury, managing director and CEO of ACC said in his presentation during the company’s annual general meeting.

“Initiative by several states towards smart cities would drive demand in the urban side while in the rural side, low-cost housing has been gaining pace. These coupled with infrastructure push like Metro Railways in several cities across the country, which are at various stages of implementations, would drive demand,” Singh said.

For the cement sector, FY18 started on a weak note with demand getting adversely affected by factors like shortage of sand in several southern and northern states, implementation of Rera or Real Estate Regulatory Authority and a slowdown in the construction activity in West.

Demand, however, revived in the later part of the previous year with production going up by a healthy 18.2% on-year in the fourth quarter.

The trend has been continuing since then. However, not everything is hunky-dory for the industry.

“While the rise in input costs is putting pressure on profit margins, there is intense competition which is limiting price hikes in most of the markets, according to Singh.

“Lumpy capacity additions in the recent past have led to an increase in debt levels and some deterioration in credit metrics, although they still remain at comfortable levels for most of the larger players. We expect an increase in coal and pet coke prices and increase in diesel prices in the coming quarters which is likely to impact profitability margins and debt metrics of cement companies in the near term,” Majumdar of Icra said.