The cement demand will be majorly driven by the housing, individual home builders and the infrastructure sector.
Cement manufacturers are poised to benefit from the continuing demand push, led by the healthy growth expected across end-markets such as individual home building, affordable housing, roads and irrigation sectors. These factors have transpired India Ratings and Research (Ind-Ra) to maintain a stable outlook on the cement sector for FY20.
The agency expects the momentum to continue in FY20, propelled by government-led spends in roads and affordable housing schemes. Utilisations are likely to rise, but not to the extent that producers would see any increase in pricing power. However, cost pressures will reduce because of stabilisations in input costs and currency movements. This coupled with cost-saving measures could lead to a modest improvement in margins in FY20.
The cement demand will be majorly driven by the housing, individual home builders and the infrastructure sector. In case of region-wise demand, north region has witnessed a major demand for cement from the infrastructure sector followed by individual home builders and housing. In the case of western region, with tremendous push for infrastructure sector couples with large-scale housing by states like Maharashtra and Gujarat, cement industry can expect a major demand. That said, the seven sisters and West Bengal in the eastern part of this country will also witness a boom in cement demand. Thanks to activities in infrastructure, housing and individual builders. For central region, with the sand mining revocation, cement industry will see more demand coming in from Uttar Pradesh and Bihar. In the south, two states Telangana and Andhra Pradesh are benefitting tremendously from their government's spending in infrastructure and large-scale housing. This will entail a good demand for the cement sector.
Big ticket to aid cement
Metro rail sector has seen strong traction in the last couple of years and is expected to provide sizeable opportunities for cement companies over the next three to five years. The overall cost of expansion of the operational and approved metro projects under implementation is over Rs 2.5 lakh crore, and another Rs 2 lakh crore worth projects are in various stages of approval and are likely to come up for bidding in the next five years. In total, about 440 km of new metro network development has been approved and another ~800 km is in the proposal stage. Given the large size of metro projects, sizeable opportunities exist for both infrastructure developers and construction companies over the next five years.
In case of roads, earlier, a mere target of 5,000 km took years to complete, however, things have changed drastically in the last four years. The government is now fast tracking its road development programme. The ministry has set the target of 10,000 km for construction of National Highways in the current financial year 2018-19 and achieved 6,715 km as on 31st Dec 2018 in FY 2018-19. HAM projects formed the bulk of the total value of awards last year at 63 per cent, followed by pure EPC contracts at 35 per cent and BOT projects the remaining. In addition, government's Bharatmala project is creating lot of optimism by constructing logistic parks worth Rs 2 trillion in 24 villages, and are heavily investing in 44 economic corridors. Bharatmala is a project worth Rs 10 trillion; within a year, and Centre will start projects worth Rs 3 trillion under Phase-I.
Greenfield industrial cities like the Delhi-Mumbai Industrial Corridor, a $100 billion project was aimed at creating a trade corridor between Delhi and Mumbai running through Delhi, Uttar Pradesh, Haryana, Rajasthan, Gujarat and Maharashtra. The DMICDC has planned eight smart cities for the Phase I of the project. Out of eight smart cities, four of them-Dholera in Gujarat, AURIC in Maharashtra, Vikram-Udyogpuri in Madhya Pradesh and IITGNL in Uttar Pradesh-are in the implementation stage, with laying of roads and utilities still in progress.
Under Sagarmala programme, the government has already awarded more than Rs 1.80 trillion in the port sector. Also, have commenced railway works and road connectivity projects too. Of the Rs 4 trillion, projects worth Rs 300-400 billion are in the tendering process. For Sagarmala, 70 per cent of detailed project reports (DPRs) are ready and by March-end, Rs 3.5 trillion projects will be up for bidding. In case of logistics, the government is developing a national logistics plan for the country, which is long term plan for the integrated development of logistics. Meanwhile, 33 per cent of the total 5,151 projects under the smart cities mission have been completed or are currently under implementation, utilising 25 per cent of the envisaged investment. Since the launch of the mission, projects worth Rs 2 trillion are in various stages of implementation in the 100 cities. So far, 534 projects worth Rs 101.16 billion have been completed. Implementation has commenced for 1,177 projects with a cost of Rs 434.93 billion and tendering has started for 677 projects with a cost of Rs 382.07 billion.
Ind-Ra believes the capacity utilisations of the cement industry would improve gradually over the next two years on account of limited capacity additions amidst the turnaround of acquired assets. According to the agency, the sector will witness capacity addition of around 20 MTPA per year over FY19-FY21 (with higher addition in FY20), and the capacity utilisation will increase by 120 bps and 200 bps in FY20 and FY21, respectively. Between 2008 and 2018, demand increased at 6.15 per cent CAGR, while capacity increased at 9 per cent CAGR. As a result, capacity utilisation rates dropped to 64 per cent in FY18 from 83 per cent in FY08, leading to increased competition and pressure on selling prices. Any further demand-supply imbalance at the regional level may impact the profitability of the players.
What lies ahead?
Ind-Ra expects cement demand to grow by a modest 6 per cent-8 per cent over the next year, driven by the diminishing base effect, increased thrust on infrastructure by the central government and various state governments, and the affordable housing segment. Over the past three quarters, the profitability (EBITDA/tonne) of cement companies has been tested by the increasing costs of inputs, especially power, fuel and freight, as the players have not been able to pass on the rise in full to the customers due to the demand-supply imbalance. Consequently, the companies are expected to post poor results in FY19. However, considering the downtrend in fuel prices since October 2018, Ind-Ra expects the cost headwinds to moderate in FY20. This would lend further support to the margins. The credit metrics of cement manufacturers are likely to deteriorate in FY19 on account of mergers and acquisitions, high capex and increased input cost. For the issuers rated by Ind-Ra, the net leverage positions are expected to improve, given their strong positions in the regions in which they operate and a stable-to-higher EBITDA per tonne due to steady cement prices and tapering input costs.
- RAHUL KAMAT