Cement production continues to record negative growth and has fallen by 3.5% in September. However there has been an improvement in the m-o-m numbers as increase in construction activity with the return of some of the labourers has resulted in an increase in demand for the commodity. Receding of the monsoons too has factored in increasing the production by 16.2% on a m-o-m basis.
Cumulatively domestic cement production has fallen by 25.1% during H1-FY21 as compared with the 14.4% and 0.7% growth in production achieved during H1-FY19 and H1-FY20. Outbreak of the COVID-19 pandemic in the Indian sub-continent which forced the government to announce a nation-wide lockdown, 25th March 2020 onwards has majorly affected the cumulative domestic cement production. Capacity utilisation of domestic manufacturers has been around 45% during H1-FY21 as units have been operating at sub-par capacities along with staggered shifts.
Cement manufacturers have at the moment cut Domestic Production and Capacity Utilisation
Table1 and 1A : Domestic Production of Cement (Unit: Million tonnes)Prod
Cement production continues to record negative growth and has fallen by 3.5% in September. However there has been an improvement in the m-o-m numbers as increase in construction activity with the return of some of the labourers has resulted in an increase in demand for the commodity. Receding of the monsoons too has factored in increasing the production by 16.2% on a m-o-m basis. Cumulatively domestic cement production has fallen by 25.1% during H1-FY21 as compared with the 14.4% and 0.7% growth in production achieved during H1-FY19 and H1-FY20. Outbreak of the COVID-19 pandemic in the Indian sub-continent which forced the government to announce a nation-wide lockdown, 25th March 2020 onwards has majorly affected the cumulative domestic cement production. Capacity utilisation of domestic manufacturers has been around 45% during H1-FY21 as units have been operating at sub-par capacities along with staggered shifts. Cement manufacturers have at the moment cut down or deferred CAPEX expenditure given the fall in demand and also as companies look to conserve their capital/cash flows given the light of the events and the uncertainty of operations.
The nationwide lockdown had come at the time when construction activities was at its peak and now with the monsoon season where again the construction activity gets stalled usually, the entire cumulative demand-supply dynamics for cement has gotten impacted.
Chart 2: Key growth drivers for the Cement Industry
Amidst the pandemic cement consumption is growing strong in the rural, semi-urban and retail markets. Cement demand is currently being driven by rural India due to better labour availability and with the reverse migration of workers; there has been an increase in construction of rural infrastructure and low cost housing. Rural demand is usually w.r.t. retail market largely which is the housing and repair and modification market.
Over the months as the economy is unlocking, demand has rebound in September, with most regions reporting a decent growth and with construction activities too picking up pace. Cement demand which has been particularly tepid in metros/tier 1 cities too is recovering in a calibrated manner.
Q2-FY20 |
Q1-FY21 |
Q2-FY21 |
H1-FY20 |
H1-FY21 |
|
OPM (%) |
19.4 |
26.8 |
24.6 |
22.0 |
25.6 |
NPM (%) |
5.3 |
7.7 |
8.8 |
7.4 |
8.3 |
ICR
(times) |
3.7 |
4.8 |
6.1 |
4.6 |
5.4 |
Due to various cost rationalisation measures and overhead controls undertaken by cement manufacturers, there has been an increase in the operating profit margins (OPM), net profit margins (NPM) and interest coverage ratio during Q2-FY21 and H1-FY21.
The overall sales revenue has increased by 3.9% during Q2-FY21 but has declined sharply by 12.1% during H1-FY21. Overall expenditure has also fallen sharply by 3.7% and 15.8% during Q2-FY21 and H1-FY21 mainly on account of supply chain management, contract renegotiations, third party spends and fuel efficiency but has increased by 27.6% on a q-o-q basis. The y-o-y decline has greatly benefitted the industry largely given the sharp fall in the topline numbers during the first half of current financial year. Selling & distribution, cost of raw materials and fuel/electricity cost accounted for 65% of the total expenses for cement manufacturers during the current financial year.
Electricity and fuel cost have declined by about 10.2% and 22.9% during Q2-FY21 and H1-FY21 due to the sharp drop in crude oil prices and lower pet coke prices. Petcoke price fell by 14.3% and 18.6% during Q2-FY21 and H1-FY21. Many cement manufacturers are also switching from use of petcoke to international coal which has high calorific value and is cheaper than pet coke.
Logistics expenses which are the biggest cost for cement industry has also dropped by -11.1% (selling and distribution) on account of renegotiation of contracts, efficiency as well as network optimization during H1-FY21 but increased by 3.6% on a y-o-y basis and by 36.8% on a q-o-q basis due to the increase in price of diesel during Q2- FY21.
Cost of raw materials too declined by 3.1% and 25.3% during Q2-FY21 and H1-FY21 due to the fall in the prices of limestone
Cement production is to fall sharply by 18-20% during FY21 and capacity utilization is to be around 45-50%.This will be the steepest ever fall in production (and capacity utilisation) that the industry has ever witnessed. Production of cement has grown by 13.3% during FY19 and fallen by 0.8% during FY20. Cement production is usually closely in-line with demand which is also poised to fall sharply given the operations have not been able pick up pace fully even with the economy on an unlock mode as the virus is showing no signs of abating.
- Demand for cement from real estate is still recovering as the sector is plagued by labour shortages and lack of liquidity.
- Given how fiscally strained the government finances are at the moment, not all infrastructure projects have resumed construction which is putting a halt to new investments towards infrastructure creation thus affecting the demand for cement.
- Growth in the housing segment which forms about 68% of cement demand (including low cost housing) is likely to be impacted as commercial & new residential launches will not be able to fully recover during FY21 and realtors will only be focusing on project completing and clearing of existing inventory.
Table
3: A timeline of recovery for cement firms during 2020-21
|
Apr- 20 |
May- 20 |
Jun- 20 |
Jul- 20 |
Aug- 20 |
Sep- 20 |
Oct- 20 |
Nov- 20 |
Dec- 20 |
Jan- 21 |
Feb- 21 |
Mar- 21 |
Cemen t |
|
|
|
|
|
|
|
|
|
|
|
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Source:
CARE Ratings
Towards Recovery Partial Recovery Stressed
Source: CARE Ratings, Company Filings
Given the weakness in end user demand due subdued activity in the housing and infrastructure sector the cement industry is expected to remain in the red zone till September 2020 at least, till the end of the monsoon season. Partial recovery is expected October-November 2020 onwards post Diwali with return of migrant labourers and normalisation of operations is expected January 2021 onwards.
Apr May Jun Jul Aug Sept 2018-19 2019-20 2020-21
Courtesy: Care Ratings Ltd.