How has the cement sector performed in Q1FY2021-22?
In April 2021 and May 2021, the production declined by 8% MoM and 18% MoM to 30.4 million MT and 25.1 million MT respectively due to the state-wise lockdowns on account of second wave of Covid-19. However, the production increased by 13% to 28.3 million in June 2021 supported by the pent-up demand. In Q1 FY2022, the production has increased by 58% YoY to 83.8 million MT. This is due to the low base effect wherein the production in April 2020 was a mere 4.3 million MT due to the nation-wide lockdown on account of Covid-19. The production in Q1 FY2022 was about 97% of pre-Covid levels (Q1 FY2020). A sharp rise in rural infections and associated healthcare costs during the second wave weakened rural sentiments to an extent and impeded growth momentum; recovery since the abatement of the second wave has, however, been healthy. Further, the affordable housing sector followed by the pick-up in the infrastructure activity has supported the cement demand in Q1 FY2022.
We are seeing a gradual shift by cement manufacturers to alternate energy, waste heat recovery system. How is this benefiting the cement manufacturers?
Domestic cement companies in recent years have been investing in alternative/renewable energy sources, replacing hitherto known sources such as fuel (in the form of coal) as well as thermal power generation which has afforded the players multiple benefits apart from reducing carbon dioxide footprint. As per ICRA analysis, the usage of renewable sources of energy such as solar energy, wind energy and waste heat recovery system (WHRS) have been gaining momentum, in particular the latter has emerged as one of the cheapest source of power generation given the negligible input costs. By generating power using the hot gases produced during the manufacturing process, WHRS is more cost efficient and helps in augmenting the operating profitability. The cost of installation of WHRS plant is around Rs. 8-10 crore per MW of capacity and with an optimal plant utilization, the pay-back period for WHRS usually is 3 years. The cost of power generation using WHRS technology is around Rs. 1.3-1.5/kwh (including depreciation and interest[1]) as compared to Rs. 4.5-5/kwh for captive thermal power. With 20%-25% WHRS replacement in total power capacity, the power cost savings for cement companies is estimated to be around 14%-18% resulting in an improvement in the operating margins by around 110-140 bps.
What is your assessment for the remaining three quarters? Where will the maximum demand for the sector come from?
The major demand drivers for cement in India is housing – rural housing and affordable housing together account for around 40-45% and urban housing for around 20-25%. The infrastructure sector accounts for 23% and the industrial capex accounts for around 10%. The rural housing demand is expected to be supported by the robust kharif harvest and continued healthy procurement, supporting farm income. In the affordable housing segment, the pending houses to be completed under PMAY-R at 6.1 million and PMAY-U at 6.3 million by CY2022 and in the urban housing segment, the low home loan rates and demand for more residential space due to shift to hybrid working model are expected to boost residential dwelling unit sales and thereby propel cement demand. The significant pick up in the infrastructure activity backed by the National Infrastructure Pipeline (NIP) is likely to see healthy traction in terms of new project awards and execution in medium term, which is expected to boost cement demand.
ICRA expects the all-India cement production to report an increase by around 12% to 332 million MT in FY2022, supported by the pent-up demand, rural housing demand and the pickup in infrastructure activity. In FY2023, the production is expected to grow by 8% to around 358 million MT.
[1] Debt to equity of 70:30 is considered.
