Cementmakers See Recovery Only By Next Year
Construction has been one of the key drivers for India’s economic growth for two successive quarters. Yet, cementmakers remain under pressure.
The industry, considered an indicator of economic health, faces a supply glut amid higher costs, underutilised capacities and low pricing power. This situation, according to annual reports of cementmakers, is unlikely to change until next year.
That comes when the government’s infrastructure spending has supported India’s growth, which crossed 8 percent after two years in the quarter ended June, according to data released by the Central Statistics Office. After manufacturing, construction was the biggest contributor, growing at 8.7 percent in the first quarter compared with 1.8 percent a year ago.
Yet, risk-averse bankers, who are struggling to deal with mounting bad loans, are slowing construction of infrastructure projects in India, Bloomberg reported quoting Union Minister for Road Transport and Highways Nitin Gadkari as saying.
Deutsche Bank said in a note that the cement sector earnings could be weak in the near term due to higher fuel and freight costs. The brokerage, however, expects that increasing cost pressures and delayed capacity additions will lead to better pricing.
Here are a few highlights from the annual reports of cementmakers:
Low Capacity Utilisation
The cement capacity of large domestic companies is lying idle due to relatively lower demand. Of the five large cementmakers, the capacity utilisation of four is more than 70 percent.
ACC expanded capacity by about 2 million tonnes per annum, while commissioning of new grinding units in Bihar and Rajasthan increased Shree Cement’s capacity to 34.9 MTPA. UltraTech Cement’s installed capacity went up significantly after acquiring assets of Jaiprakash Associates.
Stagnant Return On Equity
While UltraTech Cement and Ramco Cement have offered a lower return on equity due to a fall in profitability, the rest managed to sustain it.
Consolidation of Jaypee’s assets, which will take some time to run at full efficiency, weighed on the bottom line of UltraTech, while Ramco Cement’s financials took a hit due to issues such as ban on sand mining and political uncertainty in south India, according to statements by the companies.
The return on equity for the ongoing financial year is expected to be lower as the first five months don’t offer any encouragement on margins, according to IIFL Institutional Equities. The costs are likely to rise further on the back of rupee depreciation, the brokerage said.
Industry Outlook: A Mixed Picture?
Outlook by five cement companies that released their annual report for financial year 2017-18 and calendar year 2017.
- ACC: Intense competition and not enough demand will continue to lead to excess capacity in 2018; Situation to correct in 2019.
- UltraTech Cement: Sector can face challenges due to higher fuel prices; this can have a negative impact on margins.
- Ambuja Cement: Expects green shoot to continue for the economy.
- Shree Cement: Improved cement demand witnessed towards the second half of previous financial year is expected to continue. Energy and logistics costs are key concern areas.
- Ramco Cement: Budget focus on uplifting the rural economy, agricultural sector, healthcare, and a normal monsoon that will aid rural incomes are favourable for construction and infrastructure.