Mumbai, Apr 6 (PTI) Cement demand in India is expected to fall sharply by 20-25 per cent in the current fiscal year if the COVID-19 pandemic is not contained by May, and construction activities begin only in the second quarter, Crisil said on Monday.
The number of COVID-19 infected cases has been spiking despite the lockdown and has surpassed the 4,000 mark, while the death toll crossed 100.
Keeping a pessimistic approach, the rating agency said the cement demand in India would contract by an unprecedented 20-25 per cent this fiscal if the country is unable to contain the pandemic by May.
This would lead to extension of social distancing measures through June, and construction activity beginning only in Q2FY21.
However, assuming that lockdown and other social distancing measures will continue till April-end and construction activity may resume in mid-May, the agency noted that the fall in demand during the fiscal could be to the extent of 10-15 per cent.
“COVID-19 has cast a long shadow over a much-anticipated mild recovery in Indian economy in fiscal 2021, it noted.
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, it said adding that all this is expected to affect construction, and thereby cement demand.
According to Crisil, on a quarterly basis, cement demand would be a washout in the first quarter of this fiscal, given that the lockdown measures across India would hurt construction and demand will pick up only from the second half of this fiscal.
As government funds are diverted towards health and public welfare, its capex spends on all construction projects, which account for nearly 35-40 per cent of cement demand, will be significantly lower during the fiscal.Tweet
Besides, further weakening of the real estate sector will impact the capex spends and in-turn demand for cement, it said.
However, Crisil noted that rural housing, Pradhan Mantri Awas Yojana -rural, Pradhan Mantri Gram Sadak Yojana, and spend on key infrastructure projects will be the saving grace for the sector in the second half of the fiscal.
Due to the fall in demand, the capacity utilisation will also see a drastic fall to nearly 56-58 per cent during the year, adding to the pain from the weakening seen in fiscal 2020, when incremental supply exceeded demand by 27 MT.
“Pre-election spending in fiscals 2018 and 2019 had led to a surge in demand, and in turn to an 800 bps improvement in utilisation level to 70 per cent 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 financials had even entered newer markets, it said.
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.
The agency further noted that despite muted demand, the cement industry logged a healthy price hike of Rs 25 per 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 regional markets by the largest player. The price hike, coupled with lower commodity prices, is expected to drive margins to a seven-year high in fiscal 2020,” Crisil said.
In fiscal 2021, it expects the price run up to reverse as players will struggle on the demand front.
“The decline would be limited to 1-2 per cent or Rs 5-10 per bag as players exhibit pricing discipline, as they did last fiscal, too. However, we expect realisation to fall 2-3 per cent, as the share of non-trade is likely to increase, it stated.
Profitability is expected to be under pressure after some expansion last fiscal. The impact of demand freefall, though, will be limited by lower input prices.
Given this, the Ebitda margin for the sector is expected to contract by 100-125 bps in fiscal 2021.
“However, lower crude and coal prices should limit margin erosion as power, fuel and freight costs are expected to ease. Crude prices are expected to ease to USD 35-40 per barrel in 2020 from USD 64 per barrel in 2019.
Petcoke prices will also fall, though not commensurate with that of crude, given higher freight and disruptions in US markets. However, fixed costs are expected to rise given plant shutdown during lockdown as well as lower volumes,” it added.