Rural housing, PMAY-rural, PMGSY and spend on key infrastructure projects will be the saving grace for the sector in the second half of this fiscal.
Cement demand would contract by an unprecedented 10-15% in the current fiscal given the Covid-19 scenario. An extended vulnerability will deepen the damage for the sector to 20% to 25%, said Crisil in its analysis. It is expected that Ebitda margin to contract by 100-125 bps in fiscal 2021, it added.
Covid-19 has cast a long shadow over a much-anticipated mild recovery in Indian economy in FY21. Along with external factors such as weak global demand, supply disruptions, and global financial shocks, the economy is grappling with lockdown, factory shutdowns, reduced discretionary spending, and delayed capex cycle. All this is expected to affect construction, and thereby cement demand, Crisil pointed out.
Given the uncertainty in the current environment, we have came out with an analysis on two possible scenarios based on spread and containment period of the pandemic. Our baseline view assumes lockdown/other social distancing measures to continue till April end and construction activity to resume in mid-May and our pessimistic view assumes extended vulnerability to the virus with construction activity beginning only in the second half of this fiscal, the ratings major said.
According to Crisil, on a quarterly basis, cement demand would be a wash out in the first quarter of this fiscal, given lockdown measures across the country that would hurt construction. Demand will pick up only from the second half of this fiscal, it added.
A full-fledged recovery will take longer because, lower capex by the government due to possible diversion of funds towards health and public welfare. The government-led projects account for 40% of cement demand in India. Secondly weak real estate private individual houses and buildings housing and thirdly lower spend on PMAY-urban given the impact on incomes, and hence spends, Crisil analysis stated.
Rural housing, PMAY-rural, PMGSY and spend on key infrastructure projects will be the saving grace for the sector in the second half of this fiscal. Washout in the first quarter followed by continued mildness through the seasonally weak second quarter, will weight on the sector’s growth, leading to a first ever demand contraction of this proportion for it this fiscal, the analysis said further.
Contracting demand growth will push the sector’s utilisation level down further to 56% to 58%, adding to the pain from the weakening seen in fiscal 2020, when incremental supply exceeded the demand by 27 million tonne.
The pre-election spending in fiscals 2018 and 2019 had led to a surge in demand, and in turn to a 800 bps improvement in utilisation level to 70% in fiscal 2019. This had encouraged players to undertake aggressive capacity addition to capture incremental demand. Furthermore, to maintain market share, players with relatively weaker financial had even entered newer markets. However, the current demand shock is expected to dent the capacity addition plans of the industry, and stall or delay projects in the medium term, it pointed out.
According to Crisil, despite muted demand, the industry logged a healthy price hike of Rs 25 a bag in fiscal 2020. This came after several years, despite healthy demand growth in the preceding years, and was helped in part by continued consolidation in the regional markets by the largest player. The price hike coupled with lower commodity prices, is expected to drive the margins to a seven-year high in fiscal 2020.
In fiscal 2021, we expect the price run up to reverse as players struggle on the demand front. The decline would be limited to 1-2% or Rs 5 to Rs 10 per bag, as players exhibit pricing discipline as they did last fiscal too. However, we expect realisation to fall 2-3% as the share of non-trade is likely to increase. Profitability on its part is expected to be under pressure after some expansion last fiscal. The impact of demand freefall, though will be limited by lower input costs.
Crisil expect Ebitda margin to contract by 100-125 bps in fiscal 2021. Lower crude and coal prices should limit margin erosion as power, fuel and freight costs are expected to ease. However, fixed costs are expected to rise given the plant shutdown during the lockdown as well as lower volumes.