Cement demand may grow by 7% during FY16: ICRA

Riding high on the improvement in infrastructure, investment cycle and overall economy, the demand for cement is likely to grow by nearly 6.5-7 percent during FY16, rating agency ICRA said.

Cement demand is likely to improve gradually in the medium term in line with the recovery in infrastructure, investment cycle and overall economy, it said. ICRA expects demand to grow by 6.5-7 percent during FY16 and the pace of recovery in cement industry is likely to mirror the trends in economic recovery.

The cement capacity utilisation is likely to remain moderate at 72 percent given the capacity overhang, but it is likely to improve to 77 percent in FY17 driven by both pick-up in demand as well as slowdown in new capacity addition, it said.

All India cement production grew by 5.6 percent in FY15 as compared to 3 percent in FY14. While pre-election spending and delayed monsoon had supported the growth in cement demand in the first half of FY15, the growth slowed down in H2 FY15 once the election cycle was over, ICRA senior vice-president Sabyasachi Majumdar said.

"Cement demand was also impacted by cut down in government spending during January-March 2015 quarter, muted demand from real estate and construction projects and slow recovery in infrastructure spending," he said.

Further, decline in kharif crops production owing to poor monsoons affected agricultural incomes and post-monsoon rural demand for cement for housing and other purposes, he said, adding that "regional factors such as extension of monsoon in south, extremely cold weather and unseasonal rains in north in Q4 FY15 also affected construction activities and consequently cement demand in some areas."

According to ICRA, the profitability margins of most cement companies contracted on a quarter-on-quarter basis post monsoons due to pressure on realisations. As per ICRA estimates, the operating margins declined from 15.4 percent in Q2 FY15 to 14.1 percent in Q3 FY15.

"The profitability and debt protection metrics are likely to improve in FY16 but will continue to remain subdued. Pick-up in infrastructure projects and overall investment cycle as well as improved pricing power are likely to remain the key triggers for the sector over the near-term," he said.

However, Majumdar opined that though the presence of a stable pro-growth government at the Centre has improved the sentiment, but the results of policy initiatives taken by the new government will take time to materialise.