Cement demand is likely to improve gradually in the medium term in line with recovery in infrastructure, investment cycle and overall economy, rating agency ICRA said today.
The presence of a stable pro-growth government at the Centre has improved the sentiment, but the results of policy initiatives taken by the new government will take time to materialise, it said.
"With demand growth showing a sluggish trend during H1 FY16, ICRA expects the pace of recovery in cement industry to be moderate at 3.8-4 per cent during FY2015-16," the rating agency said in a statement.
Given the capacity overhang and a moderate demand growth, the capacity utilisation is likely to decline marginally to 70 per cent in 2015-16 but it is expected to improve to 73 per cent in 2016-17 driven by both pick-up in demand as well as slowdown in new capacity addition, the statement said.
All-India cement production grew by 1.26 per cent in the first half of 2015-16 as compared to 9.73 per cent in in a year-ago period.
While cement production declined in April 2015 by 2.4 per cent, there was a slight revival in growth to 2.5 per cent and 2.6 per cent in May and June 2015, respectively.
During the second quarter of 2015-16, while the growth remained muted at 1.3 per cent in July 2015, it picked up to 5.4 per cent in August, before showing a decline of 1.5 per cent in September 2015.
Sabyasachi Majumdar, Senior Vice-President, ICRA Ltd, said, "The overall growth of 1.26 per cent in H1 FY16 was impacted by continued muted demand from key consuming industries (real estate and infrastructure), slow recovery in infrastructure spending and high base effect (as cement demand had increased by 9.73 per cent in the corresponding period last year)".
ICRA study on select cement companies pointed out that
most cement companies in the study have reported either a decline or a modest year-on-year increase in revenues in first half of 2015-16, with the operating income increasing by a mere 1.54 per cent YoY.
"Only one company, namely OCL India Limited registered a double-digit YoY revenue growth due to growth in volumes aided by recent capacity expansion. The profitability margins of most cement companies declined on a YoY basis (except for South based companies) during H1 FY16 when compared to H1 FY15," it said.
While significant price hike in Southern markets resulted in the South based companies reporting a healthy growth in operating margin on a YoY basis, operating margins of overall ICRA Sample declined by 59 basis points to 16.02 per cent in H1 FY16 on account of the overall lower cement prices in the Northern and Western regions during H1 FY16," the statement said.
