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September 11, 2017

Sector Report: Cement

This report is available to users in India for ₹40,000 + applicable taxes

 

Demand to grow modestly in FY18 after a weak FY1

 

Cement demand was flat at 0-1% duringFY17 at its slowest pace in a decade, being severely hit post demonetization.

 

At a regional level, North was the most hit owing to higher proportion of rural population, which lacked access toadequate banking network. South region, with more banking coverage and higher urbanization remained fairlyinsulated from the impact and continued to maintain the moderate cement demand growth even in the face of cashcrunch caused by demonetization. The growth in the region during FY17 was driven by construction of capital atAmarawati and 2-BHK housing and irrigation projects in Telangana.

 

Cement demand is expected to increase by 5.0-5.5% y-o-y in FY18 on back of increased spends on roads and railways, push towardsaffordable housing by central govt., materialization of pent-up demand, particularly in rural housing and low base

 

Over a five-year period, cement demand is projected to increase at 6-7% CAGR, led by revival in government spending in housing (esp.affordable housing), marginal uptick in private housing, and fast growth in infrastructure spends (esp. urban infrastructure, road, andirrigation). At regional level eastern states followed by central and north regions would see healthier growth in demand over a low base as thestate governments sharpen focus on development.

 

Operating rates continued declining in FY17; trend to reverse in FY18

 

Operating rates continued their declining trajectory in FY17 amid weak demand growth and fell to ~70% in FY17. Going forward, in FY18, withslower capacity additions and improvement in demand, capacity utilizations are expected to increase.Over the long-term, CRISIL Research projects the industry's capacity utilization to reach 80% by 2021-22 (average 76% over the next fiveyears) with improvement in demand supply balance.

 

At a regional level, South has the lowest utilization rates at ~58% and continues to be a drag on pan-India utilization rates. With playerscurtailing capacity additions, the region's operating rate, which is hovering around 58%, is expected to gradually touch 70% by 2021-22.

 

However, in the near term, utilization rates are expected to remain below 75%, as despite the moderate growth, upcoming capacities wouldtap any sharper surge.