Cement demand growth is expected to halve to around 5 to 5.5 per cent this fiscal, impacted by weak government spending in first half and liquidity crunch faced by the real estate market, a report by Crisil Research said.
However, the profit margin for the sector would be at a six-year high on account of recent price hikes undertaken by the industry in April-June quarter and lower power and fuel costs, the report said.
"Crisil expects cement demand growth to witness a mid-cycle slowdown to 5 to 5.5 per cent on-year this fiscal, down sharply from 12 per cent in fiscal 2019," said Crisil Research.
According to the report, the demand growth will "bear the brunt of weak government spending in first half which contributes to nearly 35-40 per cent of cement demand and liquidity crunch impacting real estate market which consumes 5-8 per cement..."
Other external factors like election-related labour shortage, issues with sand and water availability in key states further affected cement demand in first quarter of the current fiscal.
Crisil Research Senior Director Prasad Koparkar said he expects a better second half (H2) for the industry this fiscal, led by a gradual pick up in demand.
"Growth in H2 will be better at 8-10 per cent on a weak H1 led by gradual pick up in government's fund release for institutional projects post higher dividend pay-out and one-time reserve transfer from RBI to government," he said.
Moreover, delayed but a good monsoon this season shall augur well for rural housing demand.
"While west and central regions shall post healthy growth of 5-6 per cent in current fiscal, south and east shall be weak at 2-4 per cent on high base of past year and constrained spending by state governments," he said.
Around 22 lakh housing units are in different stages of construction under Pradhan Mantri Awas Yojana (PMAY) PMAY-Urban and the government has set a target of 60 lakh units under PMAY-Gramin for fiscal 2020, it said.
"This alone will generate 80-85 MT of cement demand over the next year-and-a-half. This is higher than 15 lakh PMAY-Urban and 22 lakh PMAY-Gramin units that got constructed in fiscal 2019," the report said.
It further said that cement prices, which have witnessed northward trends, are expected to soften in coming months as as an additional 14-15 MT of capacities are to be commissioned in the second half and ramp-up of acquired capacities continues.
"Despite this, for fiscal 2020 overall, CRISIL Research expects prices to be up 6-7 per cent on-year, primarily led by a robust Q1," it added.
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