Cement production is expected to grow at 6-7 per cent in the current fiscal year, driven by pick-up in affordable and rural housing segments and infrastructure, a report said Wednesday.
However, rising costs are likely to put pressure on the operating profitability of cement firms in the coming quarters, Icra said in its report, adding the manufacturers' ability to secure price increases remains the key.
"We expect cement demand growth of 6-7 per cent in FY2019, driven by a pick-up in the affordable and rural housing segments and infrastructure, primarily road and irrigation projects," said Sabyasachi Majumdar, senior vice-president, Icra.
According to the rating agency, cement production remained healthy in the first four months of FY19, reporting a 14.7 per cent year-on-year (YoY) growth.
Production remained in the range of 27.5-28.6 million tonne (mt) during the April-June period, clocking the highest at 28.6 mt in June. It declined in July by 9.3 per cent on a month-on-month (MoM) basis owing to the monsoons, when cement consumption is on the lower side. However, it remained high by 10.8 per cent on a YoY basis, at close to 26 mt, it said.
The trend was supported by demand, driven primarily by low-cost housing (in south - AP and Telangana; and in the east - except Bihar) and a pick-up in the execution of infrastructure projects (in south - AP and Telangana and in the eastern and western regions), the report said.
On the capacity side, Icra estimates that around 17-19 mtpa will get added in FY19-20, primarily in the east and central regions. However, the actual production from new capacities could be lower, given that a disproportionate part of the capacity addition is largely grinding as opposed to clinker capacities, it said.
While the additions have moderated, the agency expects that the capacity overhang is likely to continue to keep the industry's capacity utilisation level below 70 per cent, over the next two years.
Lumpy capacity additions in the recent past have led to an increase in debt levels and some deterioration in credit metrics, although they still remain at comfortable levels for most of the larger players, according to the report.
While in the north and south, the prices are on the lower side by Rs 25-30 per bag, the prices in the east are largely similar in the first five months of FY19 (YoY).
Icra said the pressure on prices will continue in the second quarter of FY19, owing to the monsoons, which have an adverse impact on cement demand.
Hence, the higher power, fuel cost due to increase in coal and pet coke prices and freight costs owing to increase in diesel prices in the first half of FY19 and in the coming quarters are likely to continue to pressure profitability margins and debt metrics of cement companies
in the near term, according to the report.
"Hence, the players' ability to secure increases in cement prices remains critical from a profitability perspective," said Majumdar.