The second half of 2012-13 was a tough period for the cement industry, as cement demand plummeted and prices started to moderate.
The scenario has not improved in April as well, with prices being 4-7 per cent lower on a year-on-year basis in the West, North and the South. While the demand scenario is expected to improve gradually in 2013-14, pricing power is clearly on the wane as players, especially smaller players, fight for a larger share of the market.
Consequently, we expect average pan-India pricing growth in 2013-14 at 4-5 per cent, much lower compared to 2012-13, and earnings before interest, tax, depreciation and amortisation (EBITDA) margins to come under pressure.
Gradual pick-up in demand expected
Demand for cement increased at a relatively healthy pace of around 7 per cent year-on-year during the first half of 2012-13, owing to increased uptake in construction activity across most regions.
However, during the second half of the year, there was a considerable fall in demand with a slowdown in construction activity and a virtual halt in government spending.
This was compounded by a severe cold wave in the northern region and problems relating to sand availability in the western region.
In the southern region, the Telangana issue continued to simmer in Andhra Pradesh, due to which all activities in the state were hit. Thus, cement demand growth for 2012-13 stood at a muted 5 per cent year-on-year.
We expect demand to gradually improve over the course of 2013-14.
Growth during the year is projected to be around 7 per cent, driven by independent housing projects (particularly in semi-urban and rural areas) and pick-up in infrastructure investments such as road projects.
In the long-term also, we believe a demand growth rate of 7-8 per cent annually is sustainable, given the rising spends on housing and infrastructure projects.
The good news is that the industry is approaching the end of its investment cycle; therefore, operating rates should improve from the decadal low of 71 per cent touched in 2012-13.
According to our estimates, only around 45 million tonnes of cement capacity is likely to be added between 2013-14 and 2016-17, which is sharply lower than the 130 million tonnes of capacity that was added in the preceding four-year period. Operating rates in 2013-14 are likely to be marginally higher at around 72 per cent.
Nearly a third of the capacities to be added over the next four years will be in the southern region.
Incremental capacity additions in the region will be driven by the abundant availability of limestone, the key raw material.
Two large limestone clusters — Nalgonda and Yeraguntla — are situated in Andhra Pradesh. Sizable capacity additions are also expected in the western and eastern regions of India, buoyed by the expected increase in demand.
Prices to rise marginally
While the average pan-India cement price rose by around 13 per cent year-on-year in 2012-13, monthly trends indicate a significant tapering off in prices as the year progressed. Pricing growth, which was significant at 19 per cent year-on-year in the first half of 2012-13, moderated to 9 per cent in the third quarter and further to 6 per cent in the fourth quarter.
In April also, a traditionally strong month, average prices declined by 4 per cent year-on-year on a pan-India basis.
The softness in pricing indicates the pressure on players, especially the smaller ones, to push volumes in the quest for growth.
The steepest price hike in 2012-13 was in the eastern region, due to supply constraints arising from a shortage of railway wagons.
This is likely to remain the key bottleneck in this region over the near term. In the South, on the other hand, cement prices increased by around 7 per cent due to tepid demand growth, existing supply glut and, consequently, lower operating rates.
This is quite a contrast to the situation in 2011-12, when prices soared by nearly 23 per cent, triggered by constraints in cement supply arising from production cuts by many players in the region. This was, in fact, the genesis for the probe and subsequent ruling by the Competition Commission of India against cement companies.
We project average pan-India prices to rise by a muted 4-5 per cent in 2013-14, as demand strengthens over the course of the year. The steepest hike is expected to be in the northern region, followed by the western region.
Profitability to slip
We expect the cement industry’s EBITDA margins to decline by around 100 basis points in 2013-14.
This decline can be attributed to rising energy and freight costs along with the rather modest increase anticipated in prices.
In fact, the pressure on margins is evident in Q4 2012-13 itself, with aggregate operating margins declining by 250-300 basis points year-on-year. In contrast, EBITDA margins had increased by 100 basis points year-on-year in the first nine months of 2012-13.
The author is Director, Crisil Research, a division of Crisil.