After plunging to a 13-year low of 1.3 per cent in 2013-14, cement demand growth is expected to claw its way back in 2014-15 on the back of improved infrastructure spending and impetus in real estate sector activity but any meaningful recovery is still at least a year away.
Compared with what it was during the heydays of the previous decade, we expect demand growth to remain relatively muted at around 5 per cent in 2014-15; demand grew at a 9 per cent compounded annually between 2000-01 and 2010-11. In the first quarter of 2014-15, industry revenues grew by 10-12 per cent year-on-year, backed largely by volumes. The demand growth can be attributed to improvement in the sentiment post the general elections, and delay in the onset of monsoons. We expect volume growth to be muted in the second quarter of 2014-15.
Time lag Growth is likely to be stronger in the second-half of the fiscal as efforts by the government to boost spending on infrastructure projects and encourage greater activity in real estate will start reflecting positively on demand. But, given the time lag between announcements and implementation, any appreciable recovery in cement demand is likely to take place only from 2015-16.
But rather alarmingly for the industry, utilisation levels, which touched a 20-year low of 69 per cent (average pan-India) in 2013-14, are unlikely to improve despite the projected uptick in demand. This is because of continued capacity additions over the last few years.
Moreover, another 44 million tonnes of capacity (12 per cent of capacity as of March 2014) will be added over the course of 2014-15 and 2015-16, as several projects are at an advanced stage of progress.
However, after 2015-16, there will be some respite on this front as capacity additions are expected to slow down; this along with improvement in demand will perk up utilisation levels.
The effect of weak demand and overcapacity on profitability has been, predictably, harsh. The profitability of cement companies slumped and fell to a ten-year low during 2013-14 due to weak demand and rising cost pressures on account of freight and raw material costs.
In fact, cement prices fell by 1-2 per cent year-on-year last fiscal, the first such decline in the last eight years, indicating the intensity of pressure emanating from weak demand.
Aggregate earnings before interest, tax, depreciation and amortisation (EBITDA) margins for the industry are estimated to have declined by around 550 basis points in 2013-14. In 2014-15, with expectations of a modest price hike of around 4 per cent on a year-on-year basis (April-June 2014 average pan-India price increase was 3 per cent) amid a sustained cost push, we estimate a further dip of around 80-100 basis points in EBITDA margins. The situation, though, is likely to turn better in 2015-16; we expect the decline in profitability to be arrested with rising demand and stronger pricing growth.
Promising outlook Thus, for the cement industry in general, while the last couple of years have been challenging, the outlook seems more promising, with demand forecast to pick up and profitability too expected to stabilise. However, for South-based cement companies, a recovery is still not on the horizon.
Utilisation levels have plummeted to sub-55 per cent in the region, which accounted for as much as 40 per cent of capacity additions between 2009-10 and 2013-14. This is despite the region supplying around 15 per cent of its production to other regions.
While demand in the South is expected to gain traction, particularly after the formation of Telangana State, average utilisation levels are still unlikely to cross the 60 per cent mark even by 2016-17. The financial results for first quarter 2014-15 indicate that South-based players have performed poorly in relation to their counterparts in other regions. Revenues of South-based players such as India Cements, Ramco Cements and Dalmia Bharat declined by between 2 per cent and 5 per cent, in comparison with 10-12 per cent growth reported by the industry. On the profitability front, EBITDA margins for South-based players dipped by 470 basis points year-on-year. Further, both Dalmia Bharat and India Cements have reported losses at net level.
Many smaller plants in the southern region are functioning at below 50 per cent utilisation due to the high fragmentation in the region’s markets. This, coupled with relatively lower valuations and profitability, makes many companies in the region vulnerable to acquisitions.
The author is Director, Crisil Research, a division of Crisil.
