Though the cement sector went into standstill in lockdown, it limped back when government announced partial relaxation of lockdown and allowed construction and infrastructure activities to resume with caveat. Followed by good harvest, demand started to pick up pace. Now, with above normal rainfall, migrant labourers back to sites and a slew of infrastructure and road projects in pipeline, cement sector is all set to sail through
Covid-19 induced lockdown has brought the whole economy worldwide to a standstill. The Indian government announced total lockdown on 24th March and relaxed restrictions in phases. The construction industry was worst affected by the lockdown. With migrant labourers back to their villages, the construction, infrastructure and real estate sectors came to a complete standstill. Cement which is exclusively consumed by these sectors too had no takers. The demand for cement which peaks during March to May too came to a standstill. April passed off with minimal construction activities. Cement demand witnessed a steep fall in April. “Cement demand witnessed a sharp 85% contraction in April and a ~35% contraction in the Q1 of fiscal 2021,” says Sachin Gupta, Senior Director, CRISIL Ratings. However, with partial lifting of lockdown, in May and June, demand started to gain traction. According to ICICI Securities, “The announcement of a nationwide lockdown in lieu of Covid had a severe impact on sales volume in April with all-India level dispatches coming down by 85% YoY to 4.3 MT in April 2020”.
Metros and urban pockets were badly hit by Covid 19. Covid 19 positive cases were increasing too fast in metros while the rural India seems unaffected by the Pandemic. With a good harvest combined with labourers and construction workers back to their villages, the partial lifting of lockdown brought back demand for cement from the rural areas. With ready availability of labourers in rural pockets and higher income from harvesting of winter crops and a sharp rise in spending under the Mahatma Gandhi National Rural Employment Guarantee Act aided farmers to go for new houses or repair the old ones which pent up demand for cement in rural areas. According to a channel check conference done by Emkay Global Financial Services, “the rural sales demand for cement picked up significantly after easing lockdown norms. Individual housing segment demand has improved recently with a pick-up in urban demand. Initially, demand dipped by more than 50% when the lockdown was implemented which was primarily due to the slowdown in urban demand. Rural demand has remained strong and surprised positively”.
Production and Dispatch – An Overview
The government in May allowed restarting of manufacturing facilities under strict guidelines. The cement companies were one the first to restart their manufacturing facilities following all the guidelines issued from the government. “Safety” remains our foremost priority and therefore our company has taken every possible measure to ensure safety o fits people both in terms of health and sustainability,” says Jamshed Cooper, Managing Director, HeidelbergCement India and Zuari Cement. Wonder Cement, which operates cement plants at Nimbahera in Rajasthan’s Chittorgarh district and has a clinker grinding unit in Dhule, Maharashtra and Bhadnawar, Madhya Pradesh, too resumed operation of their manufacturing activity. “As philosophy of the Wonder Cement, We had given safety of the people a top priority. When Government allowed the resuming of operations of our manufacturing activity, we took time to make all preparations of Human safety. The mask was given all to employees and labour. Body temperature was scanned and then only employees were allowed to enter in offices/ manufacturing facilities. Social distancing was observed strictly. Soaps and water / sanitizer were made available at number locations for sanitizing of their hands. Special Patroller were deployed to keep a watch on work force and to ensure that all the guidelines are followed. Extensive trainings were imparted to all employees to follow safety guidelines,” says Vivek Patni, Director, Wonder Cement. The resuming of manufacturing cement production witnessed increase in production and dispatch from May 2020 onwards. “With the lockdown continuing for most of April 2020, the production significantly declined by 86% YoY and 84% MoM to a meagre 4 million MT. With some relaxation in the lockdown rules by the Government, the pent-up demand following complete supply stoppage and the trigger to complete pending works before the onset of the monsoons has supported some demand revival in May-June 2020. The production recovered to 22.2 million MT in May 2020 and to 26.3 million MT in June 2020. While the production improved by 17.4% MoM, it has still been lower by 6.8% on a YoY basis. In Q1 FY2021, production has been lower by 38.3% on a YoY basis,” says Anupama Reddy, Assistant Vice President, ICRA.
According to ICICI Securities, “While May dispatches improved to 22.2 MT (down 22%, up 5.4x MoM), our interaction with the dealer network indicates further improvement in volume offtake for June with likely growth of ~1.2% YoY. With this development, overall negative impact for the sector and at the company level is expected to remain lower than estimated previously. The major demand driving force has been the rural and semi-urban segment, which kept the demand momentum pretty strong as it has been least impacted by Covid and also on account of bumper Rabi season estimated this year while urban construction activities continued to remain weak due to labour migration and extended lockdown”. Government sponsored infrastructure projects like roads and highways and railways resumed construction operations with renewed vigour. Cement demand which was tepid till then, started to gain momentum and prices too increased after relaxation in lockdown. “On the pricing front, while cement companies increased prices in April - May 2020 across regions, there was pressure on the realisations towards June-end and in July 2020 in some markets. While the prices in the North and West were marginally higher by 3% and 1% respectively, that in the South were significantly higher by 12% in Q1 FY2021 on YoY basis,” says Anupama Reddy, Assistant Vice President, ICRA.
Sales & Profits in Pandamic
The cement companies could hold on to profits despite lockdown and demand remaining muted in April in Q1 FY2021. “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,” says Sachin Gupta, Senior Director, CRISIL Ratings. For Q1 FY2021 UltraTech Cement reported 36.4 per cent year-on-year (YoY) fall in net profit at Rs. 806 crore compared with Rs. 1,267 crore in the corresponding quarter last year. Shree Cement reported a 13.5 per cent drop in consolidated net profit at Rs. 330.35 crore during the June quarter of FY 21 as against a profit of Rs. 382 crore in the same period last year. While Orient Cement reported over three fold jump in its net profit to Rs. 55.89 crore for the June quarter. The company had reported a net profit of Rs 16.01 crore for the April-June quarter a year-ago. Ramco Cements reported 43 per cent drop in its net profit at Rs.110 crore for the first quarter ended June 30, 2020 when compared with Rs.192 crore in the year-ago period. ACC reported a 40 per cent fall in consolidated net profit at Rs 270.95 crore during Q1 FY2021 as against Rs. 455 crore in the same period last year. India Cements posted 76.51 per cent YoY fall in standalone net profit at Rs 16.96 crore for Q1 FY2021. It had reported a net profit of Rs. 72.43 crore in the corresponding quarter last year. “Despite a record lockdown-induced volume decline, the aggregate EBITDA/mt of listed cement companies hit a historical high of INR1,325/mt in 1QFY21 (1QFY20: INR1,252/mt, 4QFY20: INR1,064/mt) on the back of reduced costs. Power and fuel costs that form around one-fourth of the total cost of cement producers were lower by almost 20% yoy, led by a decline in coal and pet coke prices as well as better availability of domestic coal. The reduction in variable costs offset the increase in fixed costs due to an adverse operating leverage. Besides, with hikes in April and May 2020, all-India cement prices averaged around 1% yoy higher on a high 1QFY20 base, contributing to the profits. However, price elasticity of demand was visible, with entities that saw lower volumes declines witnessing lower realisations. Further, most large companies had adequate liquidity due to comfortable cash flows, unused working capital lines and financing access,” says Khushbu Lakhotia, Associate Director, India Ratings and Research.
“Despite significant decline in demand, the favorable input costs, majorly the lower power and fuel costs supported the profitability of the cement companies in Q1 FY2021. The lower power costs was on account of lower imported coal prices by 22% YoY and petcoke prices by 19% YoY in Q1 FY2021. On the pricing front, while cement companies increased prices in April – May 2020 across regions, there was pressure on the realisations towards June-end and in July 2020 in some markets. While the prices in the North and West were marginally higher by 3% and 1% respectively, that in the South were significantly higher by 12% in Q1 FY2021 on YoY basis,” says Anupama Reddy, Assistant Vice President, ICRA.
Are now Tech-enabled
“Digitization is eminent in every industry and for cement industry, the potential seems unlimited,” says Jamshed Cooper. Cement industry is labour-intensive. Every process in the cement is manual. But, things are changing for the better. Cement companies have now adopted technology which has helped the companies to plug unnecessary expanses and ring in profits. “Major cement manufacturers have adopted various cost rationalisation measures and overhead controls which has resulted in these companies not incurring a loss. Fall in the overall expenditure mainly on account of supply chain management, contract renegotiations, third party spends and fuel efficiency has greatly benefitted the industry. Based out of the assessment of 36 major cement manufacturers the overall expenditure has fallen sharply by 32.6%. Electricity and fuel cost have declined by about 42.2% due to the sharp drop in crude oil prices and lower pet coke prices. Logistics costs which are the biggest cost for cement industry has also dropped by 35.7% (selling and distribution) on account of lower railway freight given no busy surcharge season and cost of raw materials too has declined by 42.2%. Lower gypsum and fly ash prices have aided in the overall fall in cost of raw materials” says Urvisha H Jagasheth, Research Analyst, Industry Research, CARE Ratings.
“Over the years most of the processes and material handling have been manual because of the availability of low cost labour in our country. Going forward, it will not be the labour cost that will come in the play, but it is the availability of labour and the method of working that will compel organizations to automate and digitize,” says Jamshed Cooper. The industry is now open to technology implementation in manufacturing, packing and in logistics. “We have been in the forefront of technology adsorption for productivity enhancement to process optimisation. We have a full fledged Robot Lab along with Process Expert in most of our plants and are among First to adopt this in our Sector. Most of these were implemented in our plants more than a decade ago and have helped us in overall Optimisation of Processes and also have resulted in Higher Productivity along with achieving Higher Employee Satisfaction Levels. These initiatives have definitely helped us in achieving Cost Leadership Position in Our Sector and also in making our Assets amongst the best in the Country,” says Sreekanth Reddy, Jt. Managing Director, Sagar Cements.
Challenges Ahead
On the mining front the industry is going through anxious moments. It has been reported in newspapers the likelihood of deletion of section 10A(2)(b) of the MMDR Amendment Act, 2015. This section was introduced to safeguard efforts, investments and risks undertaken by holders of reconnaissance permit (RP) and prospecting licence (PL) to have a seamless conversion to the next stage after completion of exploration. The Cement Manufacturers Association (CMA), the apex body of large cement manufacturers in India, has opposed this likely move by the government, which they feel doesn’t go well with the spirit of 'ease of doing business; and mentioned that the cancellation of section 10A(2)(b) would increase hardships and revenue losses for the industry, which was struggling due to the economic slowdown and now the Covid-19 pandemic. “Traditionally, cement plants and the mines have remained as a single entity. Without limestone mines, a cement plant cannot exist, and this is to be understood by the people framing the laws. Removing the mines from the plant is like removing fish out of water. We know the consequences of the latter. I am sure that government is looking at a bigger picture and the need for stepping up industrialization is duly recognized to support its revenue stream. By making raw material inaccessible or costly, the value addition happening through industrialization would receive a set back and could defeat the overall objective. Therefore, the government needs to review its decision on 10A(2)(b) keeping the above in view,” says Jamshed Cooper. Sreekanth Reddy too shared his views on the subject, he opines, “We believe most of the Regulations are implemented and promulgated in hurried manner and MMDR Act is no exception. These Regulations do not differentiate between CaptiveandNon-Captive Mines and also places Limestone Minerals along with Other Minerals like Coal/Iron Ore/ Bauxite etc. This places at a disadvantage the Limestone Lease Holders Especially Cement Companies in many Ways especially in M&A with old PL not getting converted to ML in time and hence losing Mines due to delay and frequent Changes/amendments like Section 10A(2)(b) deletion etc. Our request to the Government is to amend these Regulations in a way that both Parties do not suffer. CMA has made many Recommendations and have been requesting for their implementation in a time bound manner”.
Steady Growth
Monsoon had an extended run this year and is about to end. Infrastructure and construction project are limping back to normal. Labourers and construction workers have started returning back to metros. Struck real estate projects have restarted construction activities. According to a Knight Frank India Q3 report on real estate, new residential unit launches increased by 4.5 times to 31,106 units in Q3 2020, compared to 5,584 units in the previous quarter. Roads and highway projects have restarted. “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,” says Sachin Gupta. Bulk of cement consumption comes from the housing sector. The government is taking many initiatives to revive the housing sector. The country reported above normal monsoon this year which bores growth for the rural economy. Already we are witnessing pent up demand for individual housing from rural pockets. The government is slowly restarting economic activities in phases and housing demand too are slowing limping back to normalcy and so is the demand for cement.
