'COVID-19 effect: Cement demand hit, likely to recover in H2 of FY21'

Domestic cement demand is likely to affect adversely due to the lockdown to control coronavirus infection and would recover only in the second half (H2) of 2020-21 post the monsoon season, according to a report.

While production, as well as offtake, is likely to be practically nil during the lockdown period, even post removal of lockdown, there may be the impact on demand revival because of factors like reduced income levels resulting in demand compression and the possibility of slower demand from affected off-takers such as construction and real estate development sectors, rating agency Icra said in a report.

However, Icra said that most operational expenses of cement players are variable in nature- thus, most major cement companies, especially those which have modest gearing and repayment and healthy liquidity are likely to be able to tide over the short-term.

 

The cement demand showed some improvement in November 2019 January 2020, however, the adverse impact of COVID-19 has ticked in March 2020 and is likely to continue in Q1 FY2021.

"With the lockdown in place, the demand offtake has effectively ceased. Most of the companies have shut down manufacturing operations and the rest are likely to be shut down shortly, Icra Ratings Assistant Vice President Anupama Reddy said.

Beyond the immediate near term, the impact could be there on offtake due to domestic demand compression arising out of loss of income of prospective consumers, she said, adding that the demand is likely to recover in H2 FY2021 post the monsoon season.

In the first 10 months of FY20, the cement production reported a modest 1.1 per cent increase to 278.8 million tonne over the year-ago period.

The demand growth was impacted owing to a slowdown in project execution due to - the general elections and labour unavailability (in Q1 FY2020), monsoons (in Q2 FY2020) and weak execution of government housing and infrastructure projects because of extended monsoons (in Q3 FY2020), the report further added.

In Q3 FY2020, south India faced muted demand momentum particularly in Andhra Pradesh and Telangana, while demand was moderate in other southern states.

In the north and central India also, the demand was modest owing to construction ban in certain areas, harsh winters among others.

However, western India saw a moderate uptick in demand trends, driven by infrastructure development and rural spending.

In the east, the demand picked up substantially towards the end of the quarter, driven by government spending on infrastructure and affordable housing segments.

At the pan-India level, cement prices are higher in the northern, southern and western markets by 20-25 per cent, 5 per cent and by 8 per cent, respectively in 11 months FY2020 on year-on-year basis.

However, the prices are lower in the eastern markets by 2-3 per cent during the same period.

The slowdown in the demand is likely to exert pressure on the cement prices in the near term.

With discontinuance of operations, the only expenses left would be manpower and debt servicing expenses and a minimal amount of factory overheads. However, most of the major cement companies have adequate liquidity and are likely to tide over the lockdown period, Reddy added.