Continuing the robust ride of the past two fiscals¹, India’s cement demand will grow 10-12% on-year to ~440 million tonne in fiscal 2024, driven by strong offtake from the infrastructure segment.

Combined with stable cement prices and softening power and fuel costs, operating profit of manufacturers is expected to recover by ~Rs 200 per tonne from a multi-year low of Rs 770 per tonne last fiscal.

This demand growth and margin rebound will spur cash accrual and keep credit profiles stable. A CRISIL Ratings analysis of 21 cement makers, accounting for 90% of domestic sales volume, shows as much.

Government spending on infrastructure development, which accounts for ~30% of annual cement sales, will drive demand. The allocation in the Union Budget for core infrastructure sectors² has shot up 38% on-year this fiscal³, with actual spending substantially front-loaded. Till July 2023, spending was a robust 40% of the budget for this fiscal.

The housing segment, which accounts for ~55% of cement demand, is expected to see steady growth owing to healthy traction in rural housing and urban real estate execution. Continued government focus on affordable housing under the Pradhan Mantri Awas Yojana will also support demand.

Our channel checks indicate cement demand growth was 13-15% in the first half of this fiscal, driven by a strong first quarter and a healthy second quarter, despite some seasonal weakness due to monsoon.

Says Koustav Mazumdar, Associate Director - Research, CRISIL Market Intelligence and Analytics, “Demand growth may moderate to 7-9% in the second half of this fiscal given the high base and as the central government capital expenditure could witness some slowdown with the general elections approaching. The delayed and uneven monsoon could cause some pullback in rural housing demand. Constrained availability of labour during the third quarter, as five states go into elections, will also play a role. However, a strong first half will support a robust double-digit growth this fiscal.”

Rising cement demand will aid revenue growth this fiscal as pan-India cement prices which dipped ~2.5% during April-August 2023 have seen a pullback recently.

Apart from steady realisations, manufacturers are expected to get a breather on the cost front after a challenging last fiscal. Prices of petcoke and imported non-coking coal - key fuel used for making cement - have slid 35-50% this fiscal through August from their last fiscal average.

Says Naveen Vaidyanathan, Director – Crisil Ratings Limited, “Power and fuel costs, which constitute 30-35% of the total production cost, will follow the trend of falling petcoke and coal prices with a lag effect. For this fiscal, power and fuel costs are likely to be lower by Rs 200-250 per tonne on-year. This will improve per-tonne profitability⁴ to Rs 950-975 this fiscal, after the eight-year low of Rs 770 seen last fiscal.”

The rebound in profitability and cash accrual will keep the sector’s leverage (measured as net debt to Ebitda) and interest coverage in a comfortable range of 1.1-1.2x and 7-8x (vs 1.2x and 6x in fiscal 2023), respectively, this fiscal, which will keep credit profiles stable.

Timely release of funds for project execution and catch-up in monsoon are crucial for the sustenance of demand, while geopolitical stability is critical for commodity and energy prices and thus, for margins of cement makers.

¹ Cement demand grew by 8% in fiscal 2022 and 12% in fiscal 2023;
² Roads, railways, power (including renewable), urban infra, telecom, ports, airports, water works
³ Rs 5.9 lakh crore budgeted for fiscal 2024 vs revised estimate of Rs 4.3 lakh crore for fiscal 2023
⁴ Earnings before interest tax, depreciation and amortisation per tonne of cement sales