by Ranjan Sharma, Senior Director, CareEdge Ratings and Ravleen Sethi, Associate Director, CareEdge Ratings
With the general election scheduled for Q1FY25, cement demand is expected to experience volatility due to disruptions caused by election-related activities. However, demand is anticipated to gradually recover post-election…
Demand growth to moderate; Infrastructure to drive demand
In recent years, the cement industry has benefitted from high volume growth, majorly driven by good demand from the housing sector, numerous infrastructure projects such as construction of roads, expressways, airports, metro rail, and generous rural demand. FY23 registered volume growth of 8.8%. Cement demand continued its uptrend even in FY24 with approximately 9% volume growth year-on-year despite moderation observed in Q3FY24.
Cement volume growth is expected to moderate to 5% to 6.5% compounded annual growth rate over FY25 and FY26 on the high base of earlier three fiscals. With the general election scheduled for Q1FY25, cement demand is expected to experience volatility due to disruptions caused by election-related activities. However, demand is anticipated to gradually recover post-election but shall remain lower than the growth registered in last three fiscals. Demand growth from rural housing is expected to be slower on the back of high base of growth observed over the recent past due to large number of units constructed under the PMAY-G scheme. However, out of the targeted 29.5 million units, only 4.1 million housing units are now pending which is expected to be completed by December 2024. Although, an additional 20 million houses under the rural low-cost housing have been announced in the interim budget 2024, however, it is spread over a long period ofnext 5 years.
In contrast, infrastructure is expected to provide fillip to the growth with the government focusing on infrastructure spending through its flagship schemes, such as PM Gati Shakti, rising investments in roads, railways, metros, airports, and irrigation. Currently, the Bharatmala project has a target to lay down 60,000 km of road with a total outlay of Rs.6.9 lakh crore out of which 34,800 km are targeted in Phase I (between 2015 and 2028). Till December 2023, road projects spanning 15,549 km have been built under Phase-I. Another major focus on infrastructure has been metros. Around 874 km of metro rail is operational in 20 cities and about 980 km is approved /under construction. The FY24–25 Budget mentioned the expansion of Metro projects and Namo Bharat trains in cities focusing on transit-oriented development.
The central government's thrust on infrastructure with a plethora of projects in the National Infrastructure Pipeline, step-up budgets along with individual state government's efforts to increase capex will drive healthy infrastructure-led demand growth for the cement sector in the medium term. Hence, cement demand from housing construction is expected to be moderate at around 4-5% over the next three fiscal years while demand from infrastructure is expected to grow in early teens. Overall, the change in demand drivers is expected to push share of infrastructure in cement demand to about 32%-34% from the current 26%-28% over the medium term.
India's growth fuels capacity addition in the cement sector, Consolidation phase to continue
The long-term growth story of India supported by continuous thrust on infrastructure, growing demand from real estate sector and expected unveiling of industrial capex going forward has led to significant capacity addition plans, especially by large players. In the immediate future, ie, till mid-FY26, the industry is expected to add 90 MTPA cement capacity. In the long term, currently announced capacities are expected to lead to an addition of 140-150 MTPA by FY28-FY30.
However, it should be noted that current capacity utilisations are at a moderate level. Between FY15 and FY20, the industry witnessed capacity expansion of around 103 MT. But demand grew only by 66MT in that period leading to lower utilisation levels at the pan-India level except FY19 which was a pre-election year.
With strong demand in recent fiscal years, including in FY24, the capacity utilisation is estimated to peak to around 70%-71%. This is 400-500 basis points higher than FY23. However, considering moderation in demand growth vis a vis new supply of capacities, the capacity utilisation is expected to remain between 68%-69% on an average over the medium term at pan-India level.
In last one decade, lot of consolidation has happened in the cement industry with the share of top 4 players’ combined installed capacity rising from 40% in fiscal of 2012 to 47% in fiscal of 2023. Around 43% of this capacity share gains came from mergers and acquisitions (M&A) and inorganic expansion largely of distressed assets. Further these top 4 players’ demand share has increased from 47% to 56% in total cement demand in the last one decade. Almost all the major players especially large ones have announced capacity additions across regions to maintain their respective market shares. Race for market share is expected to intensify going ahead and we expect large players to gain significant market shares with more consolidation on cards for the sector.
Price elusiveness to stay in medium term
Higher supply growth vis a vis lower demand growth coupled with current moderate capacity utilization is leading to elusiveness in pricing power for the industry presently. Steady growth in realisations was observed over the 5 fiscal years through FY23 at a CAGR of 4%. However, this growth was largely driven by elevated costs which required price hikes to sustain. However, in FY24, we didn’t observe any sustainable price hike which can be partly explained on account of the softening of fuel costs and partly due to heightened competition amongst players to maximise volumes.
At the start of Q3FY24, the industry reported price hikes in various regions, however, a large portion of it was rolled back by the end of Q3FY24 on account of moderation in demand growth; consequently prices in Q4FY24 registered a de-growth of 4-6% from Q3FY24 exit prices. Prices sliding in Q4 is a rare phenomenon in the cement industry as demand is generally at its peak and this is generally the strongest quarter for the industry. Players have taken price hikes in April 2024, however given the volatility in demand in this quarter due to slow down in construction activity, we don’t foresee that such hikes will be sustainable. Considering moderate demand growth expected for FY25 owing to ongoing general elections and costs continuing to be soft vis-a-vis the peaks witnessed in FY23, the realizations are expected to largely remain flat or decline by 2-3%. Any sharper decline in the prices shall impact the earnings of the players and will impact return indicators. Any major supply-demand mismatch in the industry and the resultant effect of the same on the prices shall remain monitorable over the next two years.
Summary
On a long-term basis, infrastructure is expected to provide impetus to cement demand growth with a focus on roads, metros, airports, railways, irrigation, etc. Amidst the slowing demand growth due to ongoing general elections when the construction activity generally slows down, the industry is on its path to add significant capacities over the medium term leading to balance tilting towards supply in the medium term. This along with intense competition amongst players to maintain their market shares has been putting pressure on the realisations from H2FY24. Considering the costs are expected to remain range bound, prices are expected to remain muted in FY25 as well and may register a marginal fall by 2-3% y-o-y. If the cost curve steepens due to any macro or geo–political reason amid the elusive price scenario in the industry, the same is likely to dent the profitability of cement players in FY25 and remains a key monitorable.
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