Demand prospects for cement to remain strong : ICRA
During the 5M FY2022, total cement output in India climbed to 142 million MT, a 44% year-on-year rise and a 2% increase over pre-covid levels (5M FY2020). Based on current trends, ICRA anticipates that total cement production in India would expand by roughly 12% to 332 million MT in FY2022, owing to pent-up demand, rural house demand, and a pickup in infrastructure development. Production is predicted to increase by 8% to roughly 358 million MT in FY2023.
Ms. Anupama Reddy, Assistant Vice President & Sector Head, Corporate Ratings, ICRA, comments on the growth drivers, "The robust kharif harvest and ongoing solid procurement are projected to support rural home demand." In the affordable housing segment, the pending houses under PMAY-R (6.1 million) and PMAY-U (6.3 million) are expected to boost residential dwelling unit sales and thus cement demand. In the urban housing segment, low home loan rates and increased demand for residential space due to the shift to a hybrid working model are expected to boost residential dwelling unit sales and thus cement demand. The large increase in infrastructure activity facilitated by the National Infrastructure Pipeline (NIP) is expected to generate robust traction in the medium term in terms of new project awards and implementation, which is expected to improve cement demand."
On the profitability of cement businesses, while input costs remained excessive in Q1 FY2022, ICRA's sample1 of twelve publicly traded cement companies reported the highest-ever OPBIDTA/MT of Rs. 1372/MT in Q1 FY2022, driven by increased net sales realisation and cost-cutting initiatives implemented. The sample's operating margin increased by 30 basis points year on year and 170 basis points quarter on quarter to 25.8 percent in Q1 FY2022.
Cement prices increased by 4% year on year in H1 FY2022. This is mostly due to the recent increase in input costs - electricity and fuel - as well as freight expenditures. On an input cost basis, coal prices increased by 103%, pet coke prices increased by 87%, and diesel prices increased by 20% in H1 FY2022. While ICRA's sample's revenues are predicted to expand by 13% in FY2022, primarily due to volume growth, the increased input costs are likely to impose pressure on operating margins, resulting in a margin contraction of roughly 200-230 basis points.
Ms. Reddy continued, "Capacity additions are likely to expand to around 18-20 MTPA in FY2022 and 27-30 MTPA in FY2023, up from approximately 15 MTPA in FY2021. The Eastern area is likely to lead the expansion, adding approximately 17 MTPA during FY2022-FY2023. The Central region is expected to contribute around 13 MTPA during FY2022-FY2023. With predicted demand growth in FY2022 and FY2023, utilisation is expected to improve to roughly 62%-64% from 57% in FY2021, but will remain at moderate levels on an increased base. In terms of capital financing, the reliance on debt for new capacity additions is projected to be lower in FY2022, owing to the cement companies' healthy cash generation and liquidity. In FY2022, the debt coverage ratios are likely to remain good."