CARE: Covid resurge to impact demand-supply dynamics of cement industry in Q1; Production to grow 4-7% in FY22

The demand is seen to pick up with ease in restrictions that is expected from July this year.

May 25, 2021 04:05 IST India Infoline News Service

Due to the recent spike in Covid-19 cases and consequent restrictions imposed in almost all states across India from last month onwards, the cement industry's demand-supply dynamics are expected to be impacted. The demand is seen to pick up with ease in restrictions that is expected from July this year.

In its Cement Industry FY21 research note, CARE Ratings said that the industry players seem to be cautiously optimistic about the impact of the second wave of Covid-19 on the cement industry.

In March 2021, the cement production within the country increased by 13.3% as compared to the previous month. On a year-on-year basis, the production climbed by a whopping 32.5%.

However, CARE's note highlighted that on a cumulative basis, production fell by 12% in FY21 as compared with a 0.9% decline for the same period in FY20 and a growth of 13.1% FY19.

According to CARE, the demand for this industry is primarily driven by the housing sector (about 68% including low-cost affordable housing). Industrial and Infrastructure contributes to 10% and 22% of the demand respectively.

CARE carried analysis of the financials of 13 cement players. From the analysis, it is being noted that the net sales increased by 4% from Rs 78 thousand crores to Rs 82 crores in FY21 backed by the pick-up in infrastructure activities in H2-FY21 once the restrictions were eased. Improvement in demand in H2-FY21 along with various cost optimisation measures and overhead controls are undertaken by the industry players led to improvement in Operating Profit Margin (OPM), Net Profit Margin (NPM) and Interest Coverage Ratio (ICR) in FY21.

Further, the analysis showed that the total expenditure in Q4-FY21 increased by 11.1% on a quarterly basis and 25% on a yearly basis on account of an increase in the cost of coal and pet coke which in turn increased the cost of power and electricity. CARE's note said that in addition to this, the rise in freight cost on account of the increase in diesel prices also added to the rise in overall input cost for cement manufacturers. Meanwhile, overall in FY21, the total expenditure declined by 1.6% due to various cost efficiency measures and utility agreement negotiations undertaken by the cement players.

Going forward, CARE's note said that the demand is expected to be impacted in Q1-FY22 on account of localized lockdowns in almost all states owing to the recent spike in the Covid-19 caseload. The varied localised restrictions imposed in almost all the states in the country since April 2021 could slow down the construction activities and in turn affect the demand-supply scenario for the cement industry in Q1-FY22. In addition to the above, growth in rural demand had aided the demand for cement in the last fiscal year. However, that may not be the case this year as rural areas seem to be affected on account of the second wave of Covid-19.

CARE expects the overall cement production to grow in the range of 4% to 7% in FY22. Assuming that the restrictions will be in place till the end of June 2021, demand from July onwards is expected to pick up on a gradual basis as the situation evolves based on the containment of the virus and the progress in the vaccine inoculation drive. Further, the possibility of a third wave of Covid-19 in the near future might affect the industry dynamics again.

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