The Business Bytes
Mumbai, October 14, 2024 (TBB Bureau): According to a recent analysis by CRISIL Ratings, India’s cement demand is projected to grow at a moderate pace of 7-8% year-on-year, reaching approximately 475 million tonnes (MT) this fiscal year. This follows a robust compound annual growth rate (CAGR) of 11% from fiscal years 2022 to 2024. Despite the slowdown, the operating profitability of cement manufacturers is expected to remain stable at Rs 975-1,000 per tonne, surpassing the decade-long average of Rs 963 per tonne, which will help maintain stable credit profiles across the sector.
The CRISIL analysis reviewed 18 major cement producers, which collectively account for over 85% of the domestic sales volume. It noted that cement demand grew by just 3% in the first quarter of this fiscal year, primarily due to an extended heatwave and labor shortages linked to the general elections. The second quarter is anticipated to reflect similar growth trends, attributed to seasonal factors. However, the outlook for the second half of the fiscal year appears promising.
The housing segment, responsible for 55-60% of cement demand, is expected to experience a revival, particularly in rural areas, thanks to a healthy monsoon season. Additionally, government spending on infrastructure development — which represents about 30% of cement demand—is projected to bolster overall demand. This fiscal year, the total allocation for six core cement-related infrastructure sectors in the Union Budget has increased by 6%, and overall capital expenditure (capex) remains high. While actual spending was sluggish until July, the government’s capex is anticipated to accelerate in the third quarter, significantly benefiting the infrastructure segment.
Sehul Bhatt, Director of Research at CRISIL Market Intelligence and Analytics, stated, “Cement demand is expected to rebound in the second half of this fiscal, traditionally accounting for over half of annual sales. Increased construction activity in both the infrastructure and housing sectors post-monsoon, coupled with improved labor availability after the festive season and heightened government spending under initiatives like the Pradhan Mantri Awas Yojana, should drive demand growth of 9-11% in the latter half of the year.”
Ankit Kedia, Director at CRISIL Ratings, highlighted that the power and fuel costs, which account for 30% of total production costs, are projected to decline by Rs 135-145 per tonne this fiscal year. This is attributed to decreasing prices of coal and pet coke, which are now stable. Additionally, an operating leverage benefit of Rs 30 per tonne is expected due to volume growth aligning with capacity expansion, helping maintain strong utilization levels. This should offset a marginal increase in raw material costs, keeping operating profitability in the range of Rs 975-1,000 per tonne, while also anticipating some pull-back in cement prices during the second half of the fiscal as demand revives.
With consistent profitability and projected volume growth, healthy cash accruals are expected for cement manufacturers. Financial leverage for individual players is anticipated to remain stable, with levels staying below 0.5x due to capex plans being largely aligned with cash accruals and overall capital structure. The combination of these factors, along with maintained healthy liquidity, is expected to preserve stable credit profiles across the sector.
However, the outlook for cement demand could be adversely affected by subdued construction activity or decreased infrastructure-related spending. Additionally, any fluctuations in commodity and energy prices due to geopolitical developments, as well as challenges in raising cement prices, could impact profitability expectations and will need to be monitored closely.
