ALOK SANGHI discusses the new economic realities for the cement sector.
India Inc is currently going through a tumultuous phase as companies grapple with the twin effects of demonetisation and GST. GST has impacted the entire manufacturing and services sector, with small and medium enterprises hit very hard. The disruption caused by demonetisation and uncertainty over GST implementation is evident from the GDP growth figure of 5.7 per cent for the April-June quarter, a three-year low.
Challenging times
With the global economy on the path to recovery, IndiaÆs slowdown is cause for concern as the industry deals with new realities such as digital payments (after demonetisation) and GST, which will ultimately lead to greater accountability and transparency. First-quarter growth fell primarily because of a fall in production as businesses focused on reducing existing inventory before GST was implemented. Apart from the three-year-low GDP growth rate, another worrying factor is continuous decline in the growth rate for the past five quarters. As many organised and unorganised players are yet to get hold of the working of GST, growth numbers for the next two quarters are also likely to remain subdued as is apparent from slowdown in overall manufacturing activities.
For the real estate sector, the third blow came in the form of implementation of RERA from May 2017. Although the impact of demonetisation was short-lived for many sectors, the real estate sector has not yet recovered from it. Recovery is likely to take a little longer as the lingering effects of demonetisation and RERA continue to be a source of pain for the sector.
Owing to the implementation of RERA, there has been a fall in the launch of new projects as well as a drop in sales of new units. Many existing projects are also stuck as developers have begun complying with RERA rules. Apart from registration of projects, RERA also requires developers to be much more transparent with regard to their projects, which will protect buyers. However, in the long run, RERA will be beneficial to the real-estate industry as well as customers as it will bring transparency, equality and trust among buyers and builders.
The silver lining
Amid subdued demand from the real-estate sector, the government's spending on infrastructure is a silver lining as it provides hope to allied sectors like cement, steel and power. The government is focusing on speeding up infrastructure projects to address developmental gaps. These initiatives are undertaken with the intention to create job opportunities as well. The cement sector, in particular, is pinning hope on government spending on infrastructure as it is likely to provide the much-needed push to growth amid slowdown in residential projects. The focus of the government on developing rural roads, highways, ports, airports, rail projects, logistic parks and smart cities is likely to give a fillip to allied sectors.
Apart from government spending, the cement sector is also counting on spending by the private sector. Although the private sector expenditure has been a little subdued in the past few quarters, it is expected to rebound from the third quarter of current financial year as the effects of demonetisation and GST start to fade.
The cement perspective
Earlier, cement used to attract 30 per cent tax. Now, the GST council has placed it under the 28 per cent tax rate slab, which is lower than earlier though we expected it to be included in the capital goods list and taxed at 18 per cent. However, even at 28 per cent, the industry stands to gain. GST implementation is likely to be beneficial for the overall economy, though we believe the paperwork will increase significantly initially.
We believe the margins are likely to expand for the cement industry with the implementation of GST.
Already facing the issue of overcapacity, the sector is now focusing on improving productivity and efficient use of resources; these are likely to help players when demand rebounds. Price realisation has been low for the past few years, impacting margins. Therefore, the only way for players to sustain is to control costs, which would at least maintain margins. Cement companies are also focusing on energy-efficiency and the use of alternate fuels to control costs.
Sound strategy
Sanghi Industries has a two-pronged strategy to address the current situation and growth in demand. To improve capacity utilisation ratio, we are penetrating new markets. We are doing this through the sea route, which helps us reach new markets at comparatively lower costs. We are establishing two bulk cement-receiving terminals at Navlakhi and Dharamtar and are in the process of procuring two low-draft bulk carriers to strengthen our sea route transportation and establishing three RMC plants. Second, we are doubling our capacity to 8.2 mtpa from 4.1 mtpa in two phases over the next three years, which will help us capitalise on the future expected growth rate. We are also investing in an alternate fuel feeding system to utilise waste material like municipal solid waste, oil, coal tar, plastics, oily cotton waste, ETP sludge and paint sludge generated by other industries in the kiln. We have started experimenting with the usage of these materials. Although the percentage of usage of such alternate fuels stands at around 2 per cent, we see this rising multifold in future. The commissioning of our waste heat recovery system of 13-MW capacity is in its final stage and will be completed by December 2017.
All these expansion projects are likely to be commissioned in FY20.
We are also optimising current operations by constantly investing in energy-reduction opportunities and reducing our carbon footprint. In the next 20 years, we believe India will become an economic superpower and Sanghi Cement will be proud to be part of this growth story.
About the author:
Alok Sanghi, Director, Sanghi Industries, looks after the corporate and strategic affairs of the company. He has explored several international markets for cement exports; under his leadership, the company has consolidated its position in the existing business.
