Cement margins to crack despite rising demand: Fitch Ratings

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India's cement demand is expected to expand by mid to high single digits over the medium term (FY22) after a mid-teen comeback in the financial year ended March 2022, said a report by Fitch Ratings, a global capital markets research company.

The report claims that if GDP growth is maintained, infrastructure and affordable housing get continuous push from the government, and corporate capex sees an improvement, growth across various construction end-markets will be strengthened.

Moreover, Adani Group's deal to acquire Holcim’s business in India and become the second-largest cement manufacturer in India will enhance the competition in the industry, especially with the company's potentially more aggressive attitude to capacity expansion.

By the report, industrywide utilisation will drop from 70% for FY22 to 65% as faster new capacity additions overtake demand growth, limiting pricing power amid anticipation that the sector would consolidate further.

It is also expected that cement price increases will not be enough to offset the rise in energy prices since the Russia-Ukraine conflict began. Cement makers' per-tonne margins will remain much lower in FY23 than in FY21, when reduced energy prices increased profit despite weaker demand due to the pandemic.

Notwithstanding decreased profitability and plans for higher expansion capital, leading Indian cement companies' financial flexibility will be supported by their lowered financial leverage from FY20, the report claimed.

The impact of inflationary pressure on cement demand from the Russia-Ukraine war has been minimal thus far, but if macroeconomic conditions deteriorate dramatically, downside risks to the estimates may increase.