Cement demand recovers in June; capex calls disregard second wave: Ind-Ra

The June volumes would have come despite rains affecting construction in some parts of the country, causing 35-40 per cent YoY growth in Q1FY22 on a low base

With the gradual easing of lockdowns and pre-monsoon pent-up demand, June is likely to have registered sequential growth of about 20 per cent in cement volumes, said India Ratings in its report on Tuesday.

The June volumes would be despite rains affecting construction in some parts of the country, resulting in 35-40 per cent year-on-year growth in Q1FY22 on a low base, the report said.

Cement volumes transported through rail rose 22 per cent month-on-month this June.

The month of April is likely to have seen a sequential moderation of around 10 per cent in volumes, owing to the dual impact of the second Covid-19 wave-led state lockdowns and a strong March base. As restrictions intensified due to rising cases, May is likely to have seen a decline of around 25 per cent compared to March, it said.

While volumes are seeing a gradual pick up, continued increase in pet coke, coal and diesel prices, cement companies are likely to see a moderation in EBITDA/tonne in Q1FY22.

Coal prices in Q1FY22 were nearly 50 per cent higher than the FY21 average while pet coke prices were 40 per cent higher.

Diesel prices were up 20-25 per cent year-on-year in Q1FY21 and around 15 per cent higher than the FY21 average.

The increase in commodity prices is likely to lead to an increase in power and fuel as well as freight and forwarding costs as companies gradually exhaust their low-cost inventory.

Besides, the prices of fly ash and slag have increased in the past few quarters. While most companies are setting up waste heat recovery systems to structurally reduce power cost as well as reliance on external fuel purchase, EBITDA/tonne is likely to moderate in the next couple of quarters, said the ratings agency.

In FY21, cement companies saw significant release in working capital mainly led by an increase in payables and a reduction in inventory as companies tried to optimize management of funds during the pandemic.

Aggregate net working capital fell 31 per cent year-on-year in FY21 as payables increased by 16 percent year-on-year and inventory and receivables declined by 6 per cent year-on-year and 3 per cent YoY, respectively.

India Ratings is of the view that realisations in Q1FY22 have been higher sequentially despite the impact of second wave.

Price hikes were taken in most regions in June 2021 though reports indicate partial rollback in many pockets except North. While the increase in input costs is likely to prevent cement companies from reducing prices significantly, the seasonally weak second quarter ahead could make it difficult to sustain prices, it said.

With regard to capex announcements, FY21 saw capacity additions of 14.4 million tonnes, of which capacities of 10.7 million tonne were commissioned in Q4FY21 as labour shortage and cash conservation limited the progress in H1FY21.

The quick recovery and low additions in the past couple of years fuelled capex plans with a supply pipeline of around 70 million tonnes over FY22-FY23, which is the highest ever two-year addition since FY11.

While the second wave has pushed completion timelines by a couple of quarters for most companies, it has not led to any capex deferral nor has it deterred companies from announcing medium-term expansion targets, said India Ratings.