Is the cement sector back on track to pre-Pandemic level? Your assessments
Cement sector rebounded right after the lockdown ended (i.e. in Q2FY21) led by rural housing and infrastructure spend especially on roads. Aggregate cement demand growth in India is estimated to have stayed flat at 0-1% growth in FY21. On this low base we expect a rise of 12-13% in the current fiscal led by infrastructure spend as well as urban housing (on low base of real estate construction last year). With this growth cement volumes in FY22 will be up by 9-10% over pre Covid peak levels seen in FY19.
Which sector has contributed the maximum in Q1FY2021-22?
Q1FY22 witnessed a growth of 40-42% on year basis led by urban housing and infrastructure spend. However, there was a 20% q-o-q decline led by some impact from second wave. Cement production witnessed sharper growth due to low base created on account of plant shutdown in Q1FY21. Low base of last year where cement volumes contracted by 31% also pedestalled the growth. East and North saw relatively better volume growth vis-a-vis pre-Covid levels. Central capital expenditure on core infrastructure space grew by 26% while state capex rose by x% during Q1FY22.
We are seeing a gradual shift by cement manufacturers to alternate energy, waste heat recovery system. How is this benefiting the cement manufacturers?
Cement manufacturers have been shifting towards alternate energy for quite some time now. Key initatives taken on this front include: blending other materials such as corporation waste, waste tyre, waste plastic in kilns to reduce cost as well as gather carbon footprints. However, blending has been limited to around 5%; Installing wind and solar plants to reduce grid power intake as captive power from renewable comes at a lower cost and also helps them meet target for renewable energy usage; WHRS is also being installed by most players to reduce dependence on steam power plant (SPP) / grid power. Power generation cost through WHRS (adjusted for depreciation and maintenance cost) still comes at 25-30% of grid power cost and 40-50% of cost of generation through spp / renewable.
Your take on cartelization and increasing raise in cement prices
Prices are a factor of demand, supply and input cost. Cement prices had remained stagnant over many years before seeing a rise over the last 2 years. In the current fiscal cement prices have been up by 2.3% yoy (H1 FY22). Current prices shall sustain through second half amidst healthy demand thereby translating into a 2-3% price hike for the entire fiscal. However, this would not be sufficient to cover for cost rise especially on coal and petcoke front thereby leading to a 100-200 bps contraction in margins for cement players over the peaks witnessed in last year.
What is your assessment for the remaining three quarters? Where will the maximum demand for the sector come from?
Cement demand is expected to grow at 6-7% on year over the remaining 9 months thereby driving an annual growth of 12-13% in FY22 over FY21. Urban housing and infrastructure growth would be the key growth pivots especially in East, West, and Northern regions.