Few months are left for the financial year 2020-21 to end. How will the remaining months be for the cement sector?
Cement demand witnessed a sharp 85% contraction in April and a ~35% contraction in the Q1 of fiscal2021. In Q2, the demand is expected to recover and be 12-15% lower than the last year. By Q4, we expect it to growby 7-10%, thereby limiting the damage. The recovery will be driven by a surge in demand from the rural and affordable housing segments that will help contain the year-on-year drop in cement sales volume to 12-14% this fiscal.
What is your assessment for the next financial year 2021-22 for the cement sector?
Volume is expected to grow 14-16% next fiscal as momentum from rural demand is expected to sustain on the back of three straight good monsoon years, which would continue to lift agri-incomes. Additionally, demand from real estate, infrastructure and construction sectors will return meaningfully next year, with improvement in demand as well as the fiscal health of states and the central government. Excluding the base effect of the current fiscal, cement volume next fiscal is expected to be a little higher than the fiscal 2020 volume of 328 million tonne.
Major cement manufacturers have reported a decline in net profit compared to the last quarter but not loss. How did the cement manufacturers manage to stay afloat during the lockdown and register profits in Q1 2020-21?
The operating profitability (ie, in terms of percentage) of cement manufacturers has improved ~300 basis points on-year in the first quarter. However, operating profits (ie, in terms of Rs crore) have declined due to lower volumes. Steady realisations during the quarter and across the regions, lower pet-coke prices, and implementation of cost rationalisation measures in the backdrop of the ongoing pandemic have restricted the impact of lower volumes on operating profits.
What are the challenges facing the industry?
Cement players are susceptible to volatility in input cost due to high operating leverage in the cost structure. Further, intense competition may continue to constrain scalability, pricing power, and profitability. Capacity additions in the commoditised cement industry tend to be sporadic because of the long gestation periods associated with setting up new facilities, and a large number of players adding capacities during the peak of a cycle. This has led to unfavourable price cycles for the sector in the past. Cyclical downturns in the industry result in slow sales, constraining the operating rate and ability to pass on any rise in input costs.
How receptive is the Indian cement sector to Digitization, IoT, Robotic process automation (RPA), Automation, Artificial Intelligence, data analytics? Has the industry benefited by adopting these technologies?
The sector has adopted process automation and technology advancement to an extent. However, there seem to be limited scope for sophisticated technologies such as Internet of Things and artificial intelligence owing to the less labour-intensive operations and product characteristics of the sector. Going forward however there could be opportunity to use these sophisticated technologies in the distribution and supply chain side of the cement business.
Export of cement is negligible compared to production. The capacity utilisation always hovers around 60-70 percent. Why are the manufacturers not keen on export?
The cement industry is highly regional in nature, owing to the high share of freight in the overall cost of production. For example, raw material comprises only 17% of the cost of sales compared with 28% freight cost. As such, long-distance transportation of cement is not economically viable owing to a disproportionate increase in landed cost for consumers with an increase in lead distance from the manufacturing plant. Accordingly, export opportunities are limited to countries such as Sri Lanka and Bangladesh, which can be reached from proximate locations.
The long gestation period of 2-3 years, continuous capacity additions in anticipation of growth in demand over the past 5-6 years, and regional demand-supply gap have kept overall capacity utilisation at 65-70% for the sector. While the north and central region fares well in terms of utilisation, the south faces a high oversupply situation, leading to lower utilisation. Similarly, the eastern region is witnessing significantly higher capacity addition in comparison with the current demand growth, resulting in lower utilisation levels at present.
The cement industry depends on government policies and projects to boost revenue. The pandemic has dented the revenue. How can the government step-in and hand-hold the industry in this difficult period?
That’s correct. Infrastructure contributes 20-25% of the total cement demand and a significant share of infrastructure investments are driven by the Government funded projects and public-private partnership (PPP) projects. Currently, the government’s own fiscal position is also strained due to the pandemic as tax revenues are lower and expenses on welfare functions like health and safety will be higher. But still, government can play a critical role in driving up the infrastructure investments. They could launch new PPP projects in sectors like Roads, Railways, Metro etc. NHAI, Ministry of Railways and the various state governments could play an active role in this. The government could give some special incentives for projects launched in the current year to propel this demand. Secondly, the government can further give impetus to PM Jan AawasYojana to drive up the affordable housing segment. Thirdly, the government can work towards resolving the funding issue being faced by the real estate builders so that they can finish the stuck projects and launch new projects as well.
Lastly, where will the maximum demand for the industry come from in the next financial year?
As mentioned above, cement volume is expected to grow 14-16% next fiscal as momentum from rural demand is expected to sustain on the back of three straight good monsoon years, which would continue to lift agri-incomes. Additionally, demand from real estate, infrastructure and construction sectors will return meaningfully next year, with improvement in demand as well as the fiscal health of states and the central government. Excluding the base effect of the current fiscal, cement volume next fiscal is expected to be a little higher than the fiscal 2020 volume of 328 million tonne.
