80 MT cement capacity addition in next 3 years, a ten year high

80 MT cement capacity addition in next 3 years, a ten year high

The cement industry is energized by a healthy growth outlook and pushing the pedal on capacity increases. It expects 80mnt (MT) to be added over the next three-year period through fiscal 2024. This is a quarter of the amount seen in the last three fiscals (64MT). This will be the largest capacity increase in any block over the past 10 years.

As 70% of the new capacity will be added to their market share 1,, they will have a greater market share. Their credit ratings will be strong due to lower project risks and internal accruals funding for capital expenditure. CRISIL Ratings has examined the capex plans for the top 24 cement companies, which accounts for approximately 450 MT of India’s total cement production of 538.3 MT.

Cement demand is expected to rise by more than 10% this fiscal after a flat fiscal last year. This growth will be driven by a revival in infrastructure spending and the resumption of housing construction. This fiscal will see a sharper focus by the government on roads and railways 2, and resumption housing construction.

Given the government's continued focus on infrastructure, such as roads, metros and railways, the medium-term demand outlook remains strong. In the affordable housing segment, 68% of 19.5 million units under PMAYR (as at this fiscal) have not been constructed. Cement demand should increase as these units are built in the next 2-3 fiscals.

Ankit Hakhu Director, CRISIL ratings says, "Overall we expect strong demand for infrastructure and housing to create an increment cement demand of 70MT over the next three financials. Players will be able to add 80 MT in each of the next three fiscals. This is the highest number of players in the last 10 years. A strong demand will also increase sector's utilization from 62% in the last fiscal to 67% by fiscal 2024. This will provide scale benefits to the players ."

However, the capacity increase will be uneven with 45-47 MT of additional capacity in the Eastern and Central regions. This is due to strong demand scenarios and higher current 72% utilisations. South will see an increase of 6-7 MT due to the excess supply and lower 54% utilisation.

Aditya Jhaver (Director, CRISIL Ratings), states that nearly 70% of this incremental capacity has been put up by the top 10 player, which will increase their capacity share from 63% to 65% by fiscal 2020. Players will see a rise in cost efficiency due to this and improved utilisation, rising from 70% to 75% driven by strong demand. They will also reap diversification benefits from it as three of the 10 top players will expand in areas where their current capacity share falls below 5 %."

Nearly 60% will be built on brownfield land, i.e. These top 10 companies will benefit from improvements at the same site, which will keep capital costs at Rs 4,100-4600 per tonne and lower overall cost at around Rs.25,000-26,000 crore. This will allow for a better absorption of fixed cost related to manpower, common infrastructure, overheads, as well as lowering the risks associated with land acquisition, regulatory approvals and implementation.

Nearly Rs 5,500-5.600 crore of the total expenditure had been incurred as of March 31, 2021. Internal cash accruals of Rs 50,000 crore are expected to fund the balance. This amount is likely to increase over the next three financial years. These players can also benefit from a high level of cash liquidity, which is more than Rs 30,000 crore as at March 2021.

We believe that these players' credit scores will not change significantly if there is no increase in their debt. Six of the top 10 players will be net debt-free by fiscal 2024, as opposed to four players at the end fiscal 2021.