Cement industry to see successive decline in demand in FY21: Ind-Ra

The ratings agency expects a "washout" in April 2020 due to the ongoing lockdown, followed by demand decline of around 40 per cent in May. However, it expects a gradual recovery thereafter.

The agency expects a low single-digit growth in Q2 (July-September) period and a significant recovery happening only in Q3 (October-December).

Cement demand had declined in FY20, which was only the second instance of a decline in the past 15 years, after the demonetisation affected FY17.

"India Ratings and Research expects successive declines in cement demand FY21, following the FY20 trend, with growth plunging to a historical low of negative 4-5 per cent yoy given the nation-wide lockdown till 14 April 2020," it said.

There would be continued labour force and supply chain disruptions for 20-30 days once the lockdown is lifted, and there will be lingering impact of the slowdown on infrastructure and discretionary spending.

"The agency expects a washout in April 2020, followed by a demand decline of around 40 per cent yoy in May 2020 and a gradual recovery thereafter," it added.

Muted demand, leading to a decline in capacity utilisations, will affect the ability of cement manufacturers to sustain prices at the current levels.

"These factors, in the agency's view, could reduce EBITDA by around 20 per cent compared to the earlier estimates for FY21," it added.

"While demand is likely to decline 45-50 per cent yoy inQ1, Q2 could witness a low single digit growth. With a gradual pick-up in infrastructure spending and the release of the pent-up demand, Ind-Ra expects a significant recovery starting Q3 FY21," it said, but added there could be downside risks if the lockdown is extended.

Cement manufacturers will find it difficult to recoup the lost volumes given the transition time for the resumption of full-fledged operations and the onset of monsoon in the seasonally weak Q2 FY21.

"Growth in the housing segment, that forms 60-65 per cent of cement demand, is likely to be affected given the impact of the slowdown in economic growth on discretionary spending over the next year," it said.

With the lockdown impacting income and purchasing power of agricultural and daily wage earners, the individual home builder-driven rural housing segment will witness a slowdown in FY21.

"The heightened funding challenges for the real estate sector will also slowdown launches," it said.

Demand of cement in FY20was impacted by a host of factors including a slowdown in government expenditure post general elections, change in state governments which triggered project reviews and delayed project approvals, heavy monsoons and lockdown starting in the last week of March.

"Ind-Ra's analysis of 16 of its investment-grade cement entities indicates that, barring two, most others are likely to sustain at their current rating levels despite reduced liquidity and credit metrics headroom. Risks could emanate in case the economic activity does not ramp up as envisaged post the lockdown," it added.

According to the Cement Manufacturers Association (CMA), India is the second largest producer of cement in the world and accounts for 8 per cent of the total installed capacity.

The total installed capacity in the Indian cement sector is approximately 500 million tonnes per annum, while cement production is approximately 280 million tonnes per annum, signifying an under utilisation of the capacity.