ICRA expects cement demand to de-grow by 22%-25% in FY2021 given the prolonged nationwide lockdown and subsequent state specific restrictions disrupting construction activities. The latest volume estimates are a further downward revision from the earlier 10-12% estimated in April 2020. Despite the expected significant decline in demand, the cement prices are likely to remain largely at similar levels or get only marginally corrected given that the industry exhibits pricing discipline. This along with our expectations of benign power and fuel costs is likely to result in relatively modest compression in operating profitability by around 150-200 bps only in FY2021.
With the extension of lockdown in April 2020, the production was at a meagre 4.3 million MT, a significant decline of 86% YoY. The pent-up demand following complete supply stoppage and the trigger to complete the pending works before the onset of monsoon has supported for some recovery of demand in May 2020 on MoM basis, production recovered to 22.2 million MT. As per ICRA’s interactions with the industry, the demand has recovered further in June 2020.
As per estimates, housing, including the low-cost housing segment, accounts for around 65%-70% of the cement demand followed by infrastructure segment at 20%-23%; and commercial and industrial capex at 10%. While rural housing is likely to drive the demand in the current fiscal, the urban housing, infrastructure and commercial and industrial capex are likely to take a back seat. The residential real estate sector, which has already been under stress for a prolonged period due to weak affordability, subdued demand conditions, a high inventory overhang and more recently, a liquidity crisis has been further impacted by the pandemic. The risks are only likely to increase, resulting in a substantial decline in new sales. The new launches are likely to get deferred, not only due to operating issues (construction and labour related), but also due to increasing economic uncertainties, resultant subdued demand and likely moderation in developer inflows.
The construction sector is also expected to face near term challenges due to Covid-19 with low new order inflows, challenges in execution, and pressure on profitability and cash flows. The affect would be significant in Q1 FY2021 due to lockdown, and issues around availability of labour, raw-material, and logistics impacting execution. The recovery is expected to be gradual and would likely take few quarters to revert to normalcy. Given that the Government’s priority is to fight the pandemic, the investment in infrastructure can get pushed back – particularly from the State Governments in view of fiscal constraints.
