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Cement demand FY22 could surpass 340 mn tonne; highest in a decade: Icra

Sustained rural housing demand and significant pick-up in infra activity seen as key drivers

Topics
cement industry | Cement production | Rural housing scheme

Aditi Divekar  |  Mumbai 

cement

Domestic cement demand is expected to be highest in the decade, estimated to surpass 340 million tonne in FY2022, driven by sustained rural housing demand and significant pick-up in infrastructure activity.

On the supply side, the capacity addition is also expected to increase by 22-25 million tonne in FY2022.

As per an Icra note, while the cement prices are expected to largely sustain at the recently increased levels supported by the improved demand, the higher input costs are likely to exert pressure on operating margins during the fiscal.

Though this is likely to result in some moderation in debt coverage metrics, they are likely to remain at healthy levels.

“The sentiment in the rural areas is expected to be positive on the back of favourable kharif harvest, rise in rabi sowing, reasonably healthy reservoir levels in many regions during January – February 2021 compared to average storage of last 10 years (with an early rise in temperatures, the upcoming monsoon will be crucial), favourable trends in procurement combined with a modest MSP (minimum support price) hike. This is expected to generate a healthy increase in the cash flows for the farm sector,” Rajeshwar Burla, vice president and co-group head at Icra was quoted as saying.

Alongside, continued focus on agriculture and rural development in the Union Budget of 2021-2022 is expected to boost rural housing demand. Meanwhile, the Union Budget has also increased the capital outlay for infrastructure sector.

The gross budgetary support towards capital expenditure has been increased significantly to Rs 5.54 lakh crore in 2021-22 up 34 percent from 2020-21 budget expectation, and 26 percent from 2020-21 revised estimate with higher allocation towards the infrastructure sector (roads, railways, metros, ports etc).

The pick-up in the construction activity in infrastructure segment will also support the cement demand, said Icra.

On the supply side, capacity additions are expected to be in the range of 15-17 million tonne in FY2021 as against the earlier estimates of around 20 million tonne owing to the Covid-19 pandemic when demand is adversely impacted, and the companies preserved liquidity.

The capex is likely to get back to around 22-25 million tonne in FY2022 and FY2023. The addition in eastern India is expected to lead the expansion and is expected to add around 20 million tonne followed by the central region at around 13 million tonne during FY2022-FY2023.

While in some regions like the North, the North-East and the East, the cement players’ utilisation is likely to be higher than the national average, in other regions such as the South and the West, the utilisation is likely to remain muted, given the past capacity overhang.

With the expected revival in the demand in FY2022, the utilisation levels are likely to improve to 63 percent on expanded base. The capacity utilisation will remain moderate owing to the significant capacities (especially in eastern region) being added during the same period.

“While the cement prices are likely to largely sustain driven by the significant uptick in the demand, the higher input costs, due to the increasing crude oil prices are likely to result in a moderation of OPBIDTA/MT by around Rs 220 – 270 per tonne year-on-year basis to Rs 1,050-1,100 per tonne in FY2022,” Anupama Reddy, assistant vice president and sector head at Icra was quoted as saying.

Thus, the operating margins are likely to decline to 20.4-21.0 percent in FY2022 from 24.8 percent in FY2021 and 21.2 percent in FY2020.

Notwithstanding the capacity addition in FY2022, the debt reliance is likely to remain low owing to the healthy cash generation and strong liquidity of cement-companies, said Icra.

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First Published: Tue, April 06 2021. 19:34 IST
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