Icra cuts cement, road logistic growth outlook for FY22 due to second wave

Cement volumetric growth seen declining by 10%, road logistics at 6%

The spread of the second wave of Covid-19 infections to rural regions in the country, coupled with subsequent lockdown restrictions by several states, has affected domestic cement production in the first quarter of FY22.

Noting this demand hit, Icra ratings today revised cement volumetric growth estimates for FY22 to 10-12 per cent from 15 per cent earlier.

Cement production in April was down 11 per cent month-on-month and declined 18 per cent in May, Icra said in its report.

This is unlike last year when mostly urban areas were infected, it said. Notwithstanding the onset of monsoon, the pent-up demand is expected to push the volumes starting Q2FY22, it added.

Though production volumes of cement companies may take a hit this fiscal, the credit profile of cement companies is expected to remain stable driven by the healthy cash generation and strong liquidity.

However, rising input costs could result in decline in operating margins by around 300 bps, it said.

UltraTech Cement, Shree Cement, India Cement, Bharathi Cement, Dalmia Cement and Ambuja Cement are among large cement companies in the domestic market.

“We expect a gradual recovery in rural housing supported by the higher MSP (minimum support price) for kharif crop, increased procurement by Government agencies, improved food grain production in rabi harvest and the IMD forecast for a third consecutive normal monsoon. Overall, pent-up demand and pick-up in infrastructure-led construction activity are likely to drive the off-take starting July 2021 once lockdowns are relaxed. The industry’s utilisation is expected to improve to 61-63 per cent in FY22-FY23 on an expanded base from a low of 58 per cent in FY21. However, it is likely to remain lower than 68 per cent in FY20,” the report quoted Anupama Reddy, assistant vice president and sector head, at Icra as saying.

While the capacity addition is likely to witness an increase in FY22, debt reliance is likely to remain low owing to the healthy cash generation and strong liquidity of cement companies, said Icra.

For the road logistic sector, Icra said muted business performance over Q1FY22 due to the second wave is likely to arrest yearly growth at 6-9 per cent, compared to a previous estimate of 10 percent-12 percent for FY2022.

The rating agency expects the aggregate operating profit margins of its sample of logistics companies to be in the range of 9-9.5 per cent in FY22, as against 9.9 per cent in FY21.

“Growth momentum has been hampered with the sudden spike in Covid cases in the second wave. This is reflected by a contraction in E-way bill volumes and road freight volumes over April-May 2021. We expect the sector to recover at a faster pace than previous fiscal due to relaxations in lockdown-related restrictions and the improved vaccination drive,” Suprio Banerjee, vice president and sector head at Icra Ratings was quoted as saying.

Logistic companies’ ability to hike freight rates will be key to sustaining profitability in the near term, said Icra.

Growth over the medium term would continue to be driven by demand from segments like e-commerce, FMCG, retail, chemicals, pharmaceuticals and industrial goods, coupled with the industry’s paradigm shift towards organised logistics players, post the GST and the E-way bill implementations.

Besides, multimodal offerings may gain greater acceptance and traction going forward, given that players offering multimodal services were more flexibile and better placed to service their customers during the lockdown phase.

Given these factors, and the relatively higher financial flexibility available to large organised players vis-à-vis their smaller counterparts, there is potential for increased formalisation in the sector going forward, said Icra.