Buoyed by healthy growth outlook, the cement industry is pressing the pedal on capacity additions, with ~80 million tonne (MT) expected over the next three years through fiscal 2024, a quarter more than that seen during the last three fiscals (~64 MT). This will also be the highest capacity addition seen in any block of three consecutive years, during the last 10 year period.

Market share¹ of top 10 players will increase as 70% of the new capacities will be added by them. Further, lower project risks and funding of this capital expenditure through internal accruals will help keep their credit profiles strong. A CRISIL Ratings study of the capex plans of the top 24 cement players, which account for around 450 MT of India’s total cement capacity of 538 MT, indicates as much.

After a flattish last fiscal, cement demand is set to grow strong at over 10% on-year this fiscal, driven by revival in spending on infrastructure and housing segments. Sharper government focus on roads and railways² and resumption of housing construction this fiscal will drive this growth in cement consumption.

The medium-term demand outlook also remains robust given continued government focus on infrastructure (through building of roads, metros, and railways). Also, in the affordable housing segment, nearly 68% of the 19.5 million units targeted under PMAY-R (as of this fiscal) are yet to be constructed, and cement demand should get a boost as these units get built over the over the next 2-3 fiscals.

Says Ankit Hakhu, Director, CRISIL Ratings, “Overall, we expect strong demand drivers of infrastructure and housing to create an incremental cement demand of ~70 MT over the next three fiscals. This robust demand will see players adding 80 MT in the next 3 fiscals, highest in any block of three fiscals in the past 10 years. Also, robust demand will improve sector’s utilisation from ~62% last fiscal to upto 67% by fiscal 2024, providing benefits of scale to the players.”

The capacity addition will however be skewed with almost 45-47 MT addition in the Eastern and Central regions, supported by strong demand scenario of these regions and higher current utilisations of 72%. In comparison, South is expected to see additions of only 6-7 MT, given excess supply and lower utilisation levels of 54%.

Says Aditya Jhaver, Director, CRISIL Ratings, “Nearly 70% of this incremental capacity is being put up by the top 10 players, which will shore up their capacity share to 65% by fiscal 2024 from current 63%. This coupled with better utilisation levels, improving from ~70% to ~75%, driven by strong demand will improve players’ cost efficiencies. It will also provide them diversification benefits as three of the top 10 will expand in regions where their current capacity share is less than 5%.”

Nearly 60% of the new capacities will be brownfield, i.e. enhancements at the same location, thereby keeping capital costs 40-50% lower at Rs 4,100-4,600 per tonne, and lowering overall cost to around Rs.25,000-26,000 crore, for these top 10 players. Further, this will lead to better absorption of fixed costs related to manpower, common infrastructure and overheads, and also lower the risks related to land acquisition, regulatory approvals, and implementation.

Of the total spend, nearly Rs 5,500-5,600 crore was already incurred by March 31, 2021. The balance is expected to be funded through internal cash accruals of at least Rs 50,000 crore likely to be generated over the next three fiscals. Sustained cash liquidity in excess of Rs 30,000 crore as of March 2021 also supports the capex plans of these players.

Overall, we believe there with no material increase in debt the credit profiles of these players will remain strong. Further, 6 of the top 10 players are expected to be net debt free by fiscal 2024, compared to 4 players at the end of fiscal 2021.

¹ Based on capacity
² Expected to contribute over 70% of the spending on infrastructure segment over the next 5 years2These estimates factor in slight delays in the ongoing capex due to the second wave of the Covid-19 pandemic. However, a stronger-than-expected intensity of the third wave, leading to a re-imposition of lockdowns, could delay the expectations by few months. Also, any large acquisition can result in deviations in the expected net debt levels for the companies.