Cement output to grow at 6%, but margin pressure to continue

Cement

Domestic cement production is expected to grow at 6 percent this fiscal, however, rising input costs are likely to put pressure on the operating profitability of cement companies in the coming quarters, according to rating agency Icra.

On the capacity side, it expects around 1922 million tonnes per annum to get added in FY2019, primarily in the eastern part of the country.

While the additions have been relatively on the lower side during FY2017-FY2018, the capacity overhang and moderate demand growth is likely to continue to keep the capacity utilisation level below 70 percent over the next two years, it said.

The domestic cement production was higher by 6.3 percent at 298 million tonne in FY2018, as compared to 280 million tonne in FY2017, with most of this growth recorded during the second half of FY2018, driven largely by better demand in key markets.

"We expect demand in FY2019, to be driven by a pick-up in the affordable and rural housing segments and infrastructure, primarily road and irrigation projects. The Budget of FY2019 also supports with higher rural credit, increased minimum support price, increased allocation for the rural, agricultural and allied sectors, along with continued focus on the Pradhan Mantri Awas Yojana and infrastructure investments," Icra senior vice president and Group head Sabyasachi Majumdar said.

He added that cement demand from rural housing saw a pick-up, post monsoons, following an improvement in the rural economy as a result of normal monsoons.

The agency noted that lumpy capacity additions in the recent past have led to an increase in debt levels and some deterioration in credit metrics, although they still remain at comfortable levels for most of the larger players.

"We expect higher power and fuel (increase in coal and pet coke prices) and freight costs (increase in diesel prices) in first quarter of FY2019 and in the coming quarters which is likely to pressurise profitability margins and debt metrics of cement companies in the near-term," Majumdar said.

Cement production in the last quarter of FY2018 reported 18.2 per cent year on year growth and the momentum continued in April 2018. Production remained in the range of 2627 million mt during the December 2017 February 2018 period, increasing to 28.5 million mt in March 2018.

In April 2018, the production continued to remain healthy at 27.3 million mt, an increase by 16.7 percent on a year-on-year basis.

"This is supported by demand in Andhra Pradesh and Telangana (driven by irrigation, low cost housing and infrastructure projects), several eastern states (driven by low cost housing and infrastructure demand) and western Indian markets (led by execution of infrastructure projects)," Icra said.