Cement firms set to report volume growth despite price moderation

With the Budget laying thrust on infrastructure, affordable housing and roads to fuel economic growth, the domestic cement industry is poised for a volume surge, albeit at a gradual pace, amid a moderate rise in prices.

“The Budget announcements augur well for the cement industry but it will take time for money to get absorbed in the ground. So, to that extent, the demand pick up (for cement) would mostly be seen from the second half of FY22,” Ravinder Reddy, director of Bharathi Cement, told Business Standard.

However, with land acquisition being a crucial part of any infrastructure development, a strong uptick in cement capacity utilisation could only be a gradual process, said industry experts.

“Maybe, the affordable housing segment would see some immediate demand revival as there is an extension of tax exemption for it in FY22. But for other infra projects, it is going to take time. Due to this, in the southern part of the country, utilisation may go up by just 10 per cent from the current level of 50 per cent,” said Reddy.   

The domestic cement industry has seen an average utilisation of 65 per cent over the last 5 years, said industry experts. 

“Utilisation levels are expected to improve gradually on the back of healthy demand revival on low base, aided by continued government thrust on infra. However, average utilisation levels over the next five years will be limited to 66-68 per cent only due to continued capacity additions, especially in the eastern region,” said Isha Chaudhary, director at CRISIL Research. 

Utilisation levels peaked in FY19 due to pre-election spending before shrinking to 62-63 per cent in FY21 on the back of pandemic-led demand destruction. 

“Utilisation levels may not grow much immediately as we are starting on a lower base since we (cement industry) lost one whole year to Covid. However, directionally, the cement industry is in a good position,” said Hari Mohan Bangur, managing director (MD) at Shree Cements. 

India had a cement production capacity of 545 million tonnes as on FY20. A total of 210 large cement plants account for a combined installed capacity of 410 million tonnes, while 350 mini cement plants make up for the rest. 

Though a demand uptick looks imminent for cement, industry officials remained wary on their view on the price front. “The industry will remain guarded on price hikes, especially with the government staying watchful and having recently raised the issue of carterlisation by players,” said Hemang Jani, head equity strategist (B&D) at Motilal Oswal. “Any input cost hikes such as in pet-coke or fuel prices, however, will be surely passed onto the customer,” he added. 

“Pan Indian average cement prices have been up 7 per cent year-on-year (YoY) in the December quarter of FY21. This was led by a 17 per cent increase in the southern region and 6-7 per cent in northern, central, and western regions, even as the East remained flat,” said a Motilal Oswal report. “Prices could be stable with slight positive bias due to higher input costs. Overall, do not see much upside in prices,” said Reddy. 

Meanwhile, prices in the East posted sharp decline on a quarter-on-quarter (QoQ) basis due to new capacities and higher interregional flow of material from the southern region, said the report. 

“Overall volumes in cement have picked up nearly 7 per cent in the December quarter on a YoY basis. And, eastern region could see stronger demand ahead of elections in Assam and West Bengal,” added Jani. 

Apart from the direct infrastructure-led demand, industry officials also expect continued growth in rural economies to support cement consumption. 

“More infra projects will lead to more employment across the country and result in growth of the rural economy. This will, in turn, push up demand for cement from these rural regions. So, the thrust on infra is going to have ripple effect,” said Mahendra K. Singhi, chief executive officer (CEO) and MD at Dalmia Bharat.

The company has presence in West Bengal, Assam, Tamil Nadu and Kerala where it expects strong demand from the road segment in the near term.