ICRA expects the cement demand to decline by 22%-25% in FY2021.

The government's push for the affordable housing and infrastructure segment is likely to support the cement demand in the medium term.

What has been the impact of the pandemic on the cement industry as a whole, in terms of demand -supply, production and capacity utilization, and impact on capex / expansion plans etc?

Cement production reported a growth of 5.0% YoY in January 2020 at 31.4 million MT and 8.6% YoY in February at 31.0 million MT. However, the adverse impact of the Covid-19 pandemic was felt from March 2020 onwards. With the lockdown in place from March 22, 2020, the demand offtake effectively ceased with construction activities coming to a halt. In March 2020, the production declined by 25.1% YoY to 24.8 million MT. This resulted in a decline in the production by 5.0% YoY in Q4 FY2020.

Exhibit: Trends in Cement Production

Source: Office of economic advisor

The demand off-take effectively dried up during the lockdown period of close to 40 days. With the lockdown being extended with varying forms and severities across different regions, resulting in only modest pickup in construction activities, the demand has seen a sharp correction in Q1 FY2021.Even beyond the immediate near term, post complete phase out of lockdowns, offtake could continue to be impactedgiven possibility of domestic demand compression arising out of loss of income of prospective consumers.The demand is likely to recover only from H2 FY2021 post monsoons onwards.

ICRA expects the cement demand to decline by 22%-25% in FY2021. ICRA however takes note of the fact that the rural segment has been relatively less impacted by the pandemic; and that the rural incomes may not be so impacted given likelihood of normal monsoons. Thus, we do not entirely rule out the possibility of a recovery in demand beyond what we are projecting at the moment.

In ICRA's view, the capacity addition in FY2021 is likely to be around 14-15 million MT as against the earlier estimates of around 20 million MT. This is because most companies are likely to choose to go slow on capacity addition and preserve liquidity in face of demand slowdown. Some companies have already announced their plans to defer planned capex to an extent. Given the sharp contraction in demand, the industry utilisation levels are expected to decline to around 50% in FY2021 from 68% in FY2020.

How encouraging is the recovery tale in terms of volume and price realisation and which markets lead the demand drive?

With extension of the lockdown, the production significantly declined by 85% YoY and 83% MoM to a meagre 4.3 million MT in April 2020. With relaxation of lockdown rules by the government, production recovered to 22.2 million MT in May 2020, which is 78% of the May 2019 levels. The pent-up demand, especially from rural areas, following complete supply stoppage and the trigger to complete the pending works before the onset of monsoon has supported for increase demand in May 2020 on an MoM basis. As per our interactions with the industry, the demand has recovered further in June 2020.

On the prices front, in April 2020, players in the eastern and the southern regions increased the prices, which however witnessed some correction in May 2020. During April-May 2020, prices are higher by around 2% and 3% in the northern and southern markets respectively on YoY basis. In the western markets, the prices increased in April - May 2020 on MoM basis and are largely static on YoY basis. The pressure on the realisations continued in June 2020 across regions.

What are the major challenges the industry is facing in today's context?  

On the demand side, the urban demand is headed for a slowdown in the near term. Given that the government's priority is to fight the pandemic, investment in infrastructure may get delayed to an extent - particularly from the state governments in view of their own fiscal constraints. Most of the companies in private sector too are deferring the capex plans to preserve liquidity. We expect, the impact would be significant on the construction activities in Q1 FY2021 due to lockdown, and issues around availability of labour, raw-material, and logistics impacting execution. Considering the current spike in the covid-19 cases and state specific lockdowns, the recovery is expected to be gradual and would likely take few quarters to revert to normalcy.

On the capacity side, in some regions owing to the capacity overhang, there has been some dumping in the previous month, which has resulted in pressure on prices.

Could you throw some light on the market segments?

Housing accounts for around 65%-70% of the cement demand including the low cost/affordable housing followed by infrastructure segment at 20%-23% and commercial and industrial capex at 10%. In the housing sector, rural and low-cost housing account for 40%-45% of the cement demand.

While the rural housing is likely to drive the demand in the current fiscal, the urban housing, infrastructure and commercial and industrial capex is likely to take a back seat.

Exhibit: Demand Growth Drivers

Source: ICRA research

The rural housing demand is likely to be driven by the increase in the rural farm incomes on account of a healthy outlook for the rabi crop, timely onset of monsoon and expectation of normal rainfall supporting the sowing of Kharif crops. The adverse impact of covid-19 in the rural markets is likely to be lower when compared to the urban markets.

The residential real estate sector, which has already been under stress for a prolonged period due to weak affordability, subdued demand conditions, a high inventory overhang and liquidity challenges faced by developers, is likely to be impacted quite significantly. With the coronavirus outbreak, the risks are only likely to increase, resulting in a substantial decline in new sales. The new launches are likely to get deferred, not only due to operating issues (construction and labour related), but also due to increasing economic uncertainties and resultant subdued demand expectation translating in moderation in developer inflows.

The construction sector is also expected to face near term challenges due to Covid-19 with low new order inflows, challenges in execution, and pressure on profitability and cash flows. The affect would be significant in Q1 FY2021 due to lockdown, and issues around availability of labour, raw-material, and logistics impacting execution. The recovery is expected to be gradual and would likely take few quarters to revert to normalcy.

From the sustainable point of view how do you find the Indian cement industry?

The medium to long-term outlook on the industry is stable. The government's push for the affordable housing and infrastructure segment is likely to support the cement demand in the medium term.

National Infrastructure Pipeline (NIP) - The GoI has announced an investment with the target of Rs. 111 lakh crore under NIP to be spent between FY2020-FY2025.Typically, infrastructure projects have a construction intensity of 60-80%, which would result in order inflows of Rs. 60 trillion to the construction sector over FY2020-FY2025. Majority of the investment in the NIP is allocated towards transportation, energy, urban infra and water sectors.The transportation sector can see a capital outlay of Rs. 35.8 trillion with major investment in roads and highways, railways, airports, and ports during the same period.

Affordable Housing - The Government of India (GoI) has undertaken several initiatives to promote the development of affordable housing, with a goal of providing Housing for All by 2022. The PMAY was launched in June 2015, aimed at providing affordable housing to the urban poor, and in November 2016, a rural component was added.PMAY - Urban was launched in Jun 2015 with an aim to subsidise the construction of around 1 crore urban houses, by providing Central assistance to 1 crore eligible families (beneficiaries) over the period FY2015-22. PMAY - Gramin is structured in two phases; phase I aims at providing 1 crore houses over the period FY2017-19 and phase-II at providing coverage to 1.95 crore houses over the period FY2020-22 (target of 61.5 lakh houses in FY2021).

Roads - Under the Bharatmala Pariyojana (BMP) Phase I, a total of around 34,800 km are being considered which also includes 10,000 km of balance road works under National Highway Development Program. The estimated outlay for BMP Phase I is Rs. 5,35,000 crore spread over five years between 2017-2022.

In addition, the government's focus on development of smart cities with expenditure plan of USD 7.5 billion in next 5 years, plan to enhance the metro rail networks and port development to double the capacity by 2025 would also boost the cement demand in the medium term.

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