The second wave of COVID-19 has adversely impacted domestic cement production with the all India production declining by 25% on a quarter-to-quarter basis and 35% month-on-month in April 2021, an estimate by ICRA has said.
However, a pent-up demand is expected to push the volumes starting July-September quarter, it said.
With most states imposing lockdowns due to the spread of COVID-19 infections to rural regions, (unlike last year wherein mostly urban areas were impacted), the cement off-take in May 2021 is likely to further decline by 35%-40% M-o-M, it said.
The recovery in the rural regions is expected to be gradual. However, the overall pent-up demand is likely to drive the off-take once lockdowns are relaxed, it said.
“While the sales volumes are expected to be lower by 25% Q-o-Q in Q1 FY2022; the pent-up demand is expected to push the volumes starting Q2 FY2022. The cement companies have undertaken price hikes by an average of 5% Y-o-Y in April 2021. This hike is driven by the increase in the input costs, primarily power and fuel expenses and freight expenses over the last few months,” said Anupama Reddy, Assistant Vice President and Sector Head, ICRA.
While the cement prices are likely to largely sustain in the near term, the higher input costs, due to the increasing crude oil prices and under absorption of overheads are likely to result in a moderation of EBIDTA/MT to around Rs. 1200/MT in Q1 FY2022, lower by 20% Y-o-Y and 6%-7% Q-o-Q, she said.
In terms of sales trend, the COVID-19 disruption adversely impacted the cement demand in FY2021 resulting in the sharpest de-growth over the last decade. Domestic cement production reported a decline of 12% Y-o-Y to 294 million MT, in line with ICRA’s estimates.
The major impact on production was felt in Q1 FY2021 with a production contraction by 38.3% Y-o-Y owing to the adverse impact of the nation-wide lockdown with the construction activities coming to a halt, primarily in April 2020.
While the production picked up in Q2 and Q3 FY2021 supported by rural demand, it remained lower on Y-o-Y basis. In Q2 FY2021 and Q3 FY2021, the production was lower by 10.6% Y-o-Y and 4.0% Y-o-Y respectively. However, the production reported a growth of 5.2% Y-o-Y in Q4 FY2021, majorly driven by the higher volumes in March 2021, ICRA said.
Further, this rebound in production was driven by sustained rural housing demand and pick up in the infrastructure activity. The production in March 2021 at 32.9 million MT, almost reached pre-COVID level high of 33.1 million MT, that reported in March 2019.
As for the key credit parameters, ICRA says that notwithstanding the capacity addition increase in FY2022, the incremental borrowings for cement companies is likely to remain low owing to the healthy cash generation and strong liquidity. While some moderation is expected on debt coverage metrics owing to the expected dip in the operating margins; it will still remain at healthy levels.