With the domestic cement production continuing its healthy trend in the 4M FY2019, the growth momentum is expected to continue in FY2019 and report an annual 6-7% growth. However, says an ICRA note, that rising costs are likely to put pressure on the operating profitability of cement companies in the coming quarters. Thus, the manufacturers’ ability to secure price increases remains the key for cement manufacturers.
Says Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings, “We expect cement demand growth of 6-7% in FY2019, driven by a pick-up in the affordable and rural housing segments and infrastructure, primarily road and irrigation projects.”
Cement production was healthy in 4M FY2019, reporting 14.7% Y-o-Y growth. Production remained in the range of 27.5–28.6 million MT during the April 2018–June 2018 period, clocking the highest at 28.6 million MT in June 2018. In July, the production declined by 9.3% on an M-o-M basis owing to the monsoons, when cement consumption is on the lower side. However, it remained high by 10.8% on a Y-o-Y basis, close to 26 million MT. The trend was supported by demand, driven primarily by low cost housing (in South – AP and Telangana; and in the East – except Bihar) and a pick-up in the execution of infrastructure projects (in South – AP and Telangana and in the eastern and western regions).
On the capacity side, it is estimated that around 17 – 19 MTPA will get added in FY2019-FY2020, primarily in the East and Central regions. However, the actual production from new capacities could be lower, given that a disproportionate part of the capacity addition is largely grinding as opposed to clinker capacities. While the additions have moderated, the capacity overhang is likely to continue to keep the industry’s capacity utilisation level below 70%, over the next two years. 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.
“While in the North and South, the prices are on the lower side by Rs. 25-30/bag, the prices in the East are largely similar in 5M FY2019 on a Y-o-Y basis. The pressure on prices to continue in Q2 FY2019, owing to the monsoons, which have an adverse impact on cement demand. Hence, the higher power, fuel (increase in coal and pet coke prices) and freight costs (increase in diesel prices) in H1 FY2019 and in the coming quarters are likely to continue to pressure profitability margins and debt metrics of cement companies in the near term. Hence, the players’ ability to secure increases in cement prices remains critical from a profitability perspective,” Mr. Majumdar reiterated.
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