ICRA reports domestic cement sector to see growth post FY19 of 6%

By Realty Quarter Bureau

The domestic cement sector is expected to post a 6% growth in FY2019 with growth momentum likely to sustain though input costs like power, fuel and freight expenses are likely to put pressure on the operating profitability of cement companies in the coming quarters, ratings agency ICRA has said.

Domestic cement production was higher by 6.3% at 298 million tonnes in FY2018, against 280 million tonnes in FY2017. Most of this growth was recorded during the second half of FY2018 and driven largely by improved demand in key markets, the agency said in its latest report on cement sector.

“We expect demand in FY2019, to be driven by a pick-up in the affordable and rural housing segments and infrastructure, primarily road and irrigation project,” Sabyasachi Majumdar, senior vice president, ICRA Ltd said.

The Budget of FY2019 also supports with higher rural credit, increased Minimum Support Price (MSP), increased allocation for the rural, agricultural and allied sectors, along with continued focus on the Pradhan Mantri Awas Yojana (PMAY) and infrastructure investments, the report said. “Cement demand from rural housing saw a pick-up, post monsoons, following an improvement in the rural economy as a result of normal monsoons,” he added.

Cement production was healthy in Q4 FY2018, reporting 18.2% Y-o-Y growth and the momentum continued in April 2018. Production was in the range of 26–27 million tonnes in the December 2017–February 2018 period and increased to 28.5 million tonnes in March 2018. In April 2018, the production continued to remain healthy at 27.3 million tonnes, an increase by 16.7% on a Y-o-Y basis. This is supported by demand in Andhra Pradesh and Telangana (driven by irrigation, low cost housing and infrastructure projects), several eastern states (driven by low cost housing and infrastructure demand) and western Indian markets, led by execution of infrastructure projects.

ICRA said in terms of capacity addition, it expects around 19 – 22 MTPA to get added in FY2019, primarily in the eastern region. While the additions have been relatively on the lower side during FY2017-FY2018, the capacity overhang and moderate demand growth 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, ICRA said.” We expect higher power and fuel (increase in coal and pet coke prices) and freight costs (increase in diesel prices) in Q1 FY2019 and in the coming quarters which is likely to pressurise profitability margins and debt metrics of cement companies in the near term,” Majumdar pointed out.