"Green shoots seen in housing segment last fiscal"
"Green shoots seen in housing segment last fiscal"

"Green shoots seen in housing segment last fiscal"

Binod Kumar Modi,
Senior Analyst, Reliance Securities

How do you see the three segments of cement demand - residential, infrastructure and industrial construction - are set to boost/impact cement demand this year?
Residential:
Green shoots in IHB (Independent House Building) segment were witnessed in the last fiscal. Further, revival in rural economy is also aiding demand growth. We believe residential, which forms a significant proportion of total cement consumption, is likely to remain the major demand driver in subsequent years. Further, government's incentivised housing projects are likely to ensure sustained demand from residential segment.
Infrastructure:
The segment forms approximately 25-30 per cent of total cement consumption in India. We believe infrastructure share in total consumption is likely to move higher going forward. Growing urbanisation and huge infrastructure deficit in the country - which requires infrastructure development as to support sustained GDP growth - are likely to ensure higher cement consumption in this segment.
Industrial construction:
It forms around 5-8 per cent of total cement consumption. Likely revival in private capex is expected to drive higher consumption from this segment.
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?
As we mentioned earlier, there is a visible revival in rural economy as evidenced from robust volume growth by FMCG companies, two-wheelers and tractor volumes with back-to-back normal monsoon. Therefore, considering the fact that rural accounts for >50 per cent of total cement consumption in housing, we believe rural segment should continue to drive cement consumption. Further, post RERA's initial disruption in urban real estate market, urban real estate markets too will witness traction hereon. Moreover, PMAY is expected to witness healthy momentum in FY19, which is expected to aid demand growth.
Pre-poll year is considered to be an infrastructure year. What are the infrastructure areas that may get boost going by last Budget?
Pre election spending has been one of the key demand drivers historically in India. Considering three assembly elections in FY19 and general election in 2019, these are expected to ensure healthy consumption from infrastructure segment. We further expect traction in road construction to continue in FY19 considering 7,400 km (up 70 per cent YoY) projects awarded in FY18. Additionally, Bharatmala programme - which targets to build approximately 34,800 km by 2022 in Phase I, with an estimated investment of Rs 5.3 trillion - is likely to aid sustained demand growth for cement industry.
What is the demand growth do you foresee for the year in the geographies of your operations and what are triggers?
We believe all regions should do well going forward as demand momentum has picked up in most of the pockets barring few. Resolution of sand issues in Uttar Pradesh and visible ease of sand availability in Tamil Nadu markets (these two states together consume 45-50 MT annually) are likely to support demand in FY19. We believe that Eastern region (registered double digit demand growth in FY18) continues to be attractive for cement consumption going forward as the region is still underdeveloped compared to other regions.
How the consolidation underway in the industry, and expansions coming on stream, are set to impact capacity utilisation during the year?
Consolidation is imperative for Indian cement industry as it is still fragmented. With the ongoing consolidation happening by way of Binani, Century and Murali, no sizeable consolidation appears in sight as of now. However, considering the ongoing high cost scenario and muted realisation environment, it could be difficult for many small and mid-sized cement companies to operate in dismal profitability. Hence, industry consolidation will continue going forward. We foresee the industry to add new capacity of 40-45 MT in next three years as against incremental consumption of 65-70 MT during the same period, which clearly favours utilisation.
Hope floats for cement industry. How do you see the growth prospects for the industry during the current year and in the next three years?
There has been a visible demand recovery in FY18 especially in the second half. Cement demand witnessed a growth of approximately 6-7 per cent in FY18 as against negative growth registered in the first half of the fiscal. A substantial recovery in rural demand especially from IHB segment along with sustained pickup in infrastructure development aided demand growth. We believe demand growth for current fiscal should remain healthy mainly to be supported by PMAY housing projects and continued thrust on infrastructure development. We foresee cement consumption to reach 350-360 MT in FY21 translating a CAGR of approximately 7.5 per cent through FY18-FY21E.
What are the triggers/reasons for your views on the Industry's growth prospects and how they are set to impact in your view?
Housing activities (approximately 60-65 per cent of total consumption) continue to remain the key drivers. The government is committed to accomplish its target of construction of 10 million houses under PMAY (Rural) in phase 1, which ends in FY19E. Latest data shows that government could achieve only 38 per cent of its target till FY18. We believe even if government manages to achieve 70 per cent of the balance target, there could be incremental cement consumption of approximately 20 MT in FY19. Further, traction in IHB segment, infrastructure development and pre-election spending are likely to drive cement demand.
What are the changing dynamics of cost and profitability of the industry during the current year, from the present standpoint?
A persistent spike in petcoke and diesel prices remains a major headwind for the industry. Having surged by approximately 22-25 per cent in FY18, petcoke prices continued to move northwards till date in FY19. Industry's power and fuel cost and freight cost together surged by approximately Rs 200-300 per tonne in last one year. We believe cement industry is unlikely to witness any meaningful reduction in fuel prices in FY19E. Hence, realisation improvement is the prime way to support profitability. Pricing scenario in FY18 was soft as all-India average realisation did not witness any improvement. However, there has been some improvement in realisation so far in this fiscal and we expect further price improvement post monsoon.
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