Cement demand is expected to grow at 13-14 per cent year-on-year in FY22 after two consecutive years of flat-to-negative growth, India Ratings and Research (Ind-Ra) said on Tuesday.
The growth in cement demand in conjunction with robust profitability is likely to keep credit profiles of manufacturers strong.
“As a result, Ind-Ra has also maintained a ‘Stable rating Outlook’ on its rated cement portfolio for FY22,” Ind-Ra said.
“The cement demand to gross domestic product growth multiplier is likely to hit 1.3x in FY22, compared to the trailing 15-year average of 0.9x.”
According to Ind-Ra, this growth will be led by a strong rural demand on the back of three consecutive favourable monsoons, which limited the volume decline in 9MFY21 to around 5 per cent YoY as the growth returned in 2QFY21.
“The growth in the multiplier will also be attributed to government spending on infrastructure, with the FY22 budget demonstrating the government’s focus on infrastructure growth, a 26 per cent increase (over the revised estimate for FY21) in capex spending to INR5.5 trillion.”
“Notwithstanding some recovery in FY22, cement demand from urban housing and industrial or commercial segments, that were hit hard in FY21, would remain lower than in FY19.”
As per Ind-Ra, while FY21 is likely to see limited capacity additions, FY22-FY23 could witness one of the highest capacity additions since FY09-FY11.
“Yet, the utilisations are likely to remain at 66-67 per cent in FY22-FY23, which should be a supportive backdrop for industry profitability.”
“Encouragingly, the bulk of the capex is concentrated in regions which are also witnessing a higher demand or capacity utilisations such as East and Central than South or the slow-growing Western region.”
Besides, the ratings agency cited that with grinding units constituting 65-70 per cent of the announced additions, clinker utilisation will continue to surpass cement utilisation by 900-1,000 bp, constraining utilisations of many new capacities.
“Ind-Ra believes that demand in the eastern region will continue to grow the fastest in FY22, supported by demand from individual home builders and government’s rural housing schemes for east and central regions due to the housing shortage.”
“Cement companies in poll-bound states of West Bengal, Assam and Tamil Nadu are likely to benefit from the economic corridors announced for construction over the next few years.”
In addition, central fiscal funding for metro projects in Kochi, Chennai, Bengaluru, Nagpur and Nashik projects could benefit south-west focused players.