The Business Bytes
TBB BUREAU
BHUBANESWAR, JANUARY 23, 2024
The Indian cement sector is poised to augment its capacity by 150-160 million tonnes per annum (MTPA) over the next five years, commencing this fiscal. This growth, pursued through both organic and inorganic avenues, is in anticipation of increased demand in infrastructure and housing sectors, and to secure a stronger foothold in a highly fragmented and competitive industry.
Over the past five fiscal years, the industry added a substantial 119 MTPA capacity, culminating in a total of 595 MTPA. Projections indicate that 70-75 MT of the upcoming capacity addition will be operational in the next fiscal year, with a notable 50-55 percent concentrated in the eastern and central regions. Large players are expected to account for 50-55% of this planned capacity expansion.
The robust demand witnessed in the last two fiscal years has fortified the balance sheets of major players and some well-positioned mid-sized ones, encouraging them to expand capacity fueled by healthy cash accrual and a robust credit profile. In the current fiscal, a 10-12 percent growth in demand is anticipated, driven by government initiatives in affordable housing and pre-election spending on infrastructure.
Despite this, incremental supply and intensified competition are projected to restrict price growth to 0-1 percent, maintaining prices at Rs 390-395 per 50 kg bag, and keeping utilization at 70-75 percent. Looking ahead to the next fiscal year, CRISIL MI&A expects a more moderate 4-6 percent growth in demand due to a high base from the previous three fiscal years. Rising raw material costs and a stable base are likely to result in a modest uptick of 1-3 percent in prices to Rs 400-405 per 50 kg bag.
Miren Lodha, Director-Research at CRISIL Market Intelligence and Analytics, notes, “Cement prices slipped marginally, by 1 percent, during April-December 2023, marking a trend reversal after four years of growth between fiscal 2020 and fiscal 2023 at a compound annual growth rate of 4 percent. With cement makers adding 35-40 MTPA of capacity this fiscal, the highest in more than a decade, and acquired capacities being ramped up, a significant increase in supply would test market discipline and restrict the increase in prices to only 0-1 percent.”
Sehul Bhatt, Associate Director-Research at CRISIL Market Intelligence and Analytics, adds, “Softening of power, fuel, and freight costs, constituting 50 percent of the total production cost, has provided a breather to manufacturers amid steady realizations. Hence, lower costs, steady prices, and healthy volumes will expand the sector’s operating margin by 300-350 basis points (bps) to 16.5-18.5 percent this fiscal. The rebound in profitability comes after a contraction of ~620 bps last fiscal due to higher petcoke and coal prices.”
In the last two fiscal years, skyrocketing energy costs had adversely affected the profitability and balance sheets of players, leading to consolidation in the sector as larger players acquired struggling competitors facing high costs. The capacity share of large players increased to 48 percent in fiscal 2023 from 45 percent in fiscal 2018. A series of mergers and acquisitions resulted in the transfer of 110-115 MTPA capacity, with large players acquiring 43-45 MTPA. Furthermore, their organic capacity addition stood at 50-52 MTPA.
The pace of consolidation has accelerated in the current fiscal, with over 20 MTPA of capacity acquired from April to December 2023. This trend is expected to persist as players continue to expand their capacities.
