Infra push to see cement demand improve to 5% in FY'18: Icra

An expected revival in the infra space may help the cement demand to grow to around 4 to 5 per cent in the next fiscal, according to rating agency Icra.

The agency said that FY2016-17 would be a flat year for the sector as demonetisation had a negative impact on real estate and construction activities and the situation is likely to normalise from the first quarter of FY 2017-18 onwards.

Icra is expecting an uptick in demand from road and irrigation projects and the housing segment next fiscal, which would support the cement prices going forward.

Meanwhile, it also added that rising costs as transportation is likely to put pressure on the profitability for the next few quarters.

"Icra expects cement demand growth to recover to around 4-5 per cent during FY2018, driven by a pick-up in the infrastructure segment," Icra Ratings Senior Vice President & Group Head Sabyasachi Majumdar said.

The increased budgetary allocation for infrastructure sector, which includes roads, railways, metro, irrigation and housing, during FY 2017-18 will support cement demand.

"Also, higher rural credit and increased allocation for rural, agricultural and allied sectors, including the demand for rural housing, are significant contributors to the overall cement demand mix," he said.

According to the agency, cement volumes during November 2016 to January 2017 declined by 8 per cent as against their corresponding period impacted by the demonetisation.

"All-India cement production reported a moderate growth of 1.1 per cent in 10M FY2017 to 233 million MT, with the growth rate being lower than the 3.6 per cent witnessed in 10M FY2016," said Icra.

The agency is expecting demand during the current fiscal to remain flat.

"While in the short term, demonetisation has had a negative impact on real estate and construction activities and hence on the cement off-take, the impact is expected to subside and the situation is likely to normalise from Q1 FY2018 onwards," said Majumdar.

Energy and freight costs are under pressure on the back of rising pet coke, coal and diesel prices during Q3 and Q4 FY2017.

"Given the large usage of pet coke across companies and the low cost pet coke inventory being exhausted by the companies, the full impact of this price rise is expected to be visible during Q4 FY2017. In addition to this, there has been a nearly 12 per cent increase in diesel prices during 9M FY2017 on a YoY basis," it said.

The trend has continued during January and February 2017, wherein diesel prices have increased by 28 per cent and 32 per cent, respectively.

"This is likely to put pressure on the freight costs of cement companies," it said.