MUMBAI: India's cement demand is likely to contract by 10-15% year-on-year in fiscal year 2021, as several Indian federal regions are likely to be hit in the second quarter of this fiscal year by imposing quarantine policies to curb the spread of infectious diseases. At the same time, floods in the eastern and central regions will also put pressure on off-season demand in the second quarter. "Although sales in the first quarter of fiscal year 2021 performed better than expected, India Ratings and Research (Ind-Ra) believes that cement demand in fiscal year 2021 may shrink by 10% -15% year-on-year," India Ratings Research said
in a research report on Thursday. Cement companies across India announced price increases in April and May 2020
due to the disruption of cement supply and the rapid recovery of demand. India's south rose the most, followed by the west. Despite the rapid growth in demand, the pricing environment in the eastern Indian market has been depressed by the simultaneous increase in supply, which has led to oversupply. "We believe that the weakness of cement prices may intensify in the off-season of the second quarter of fiscal year 2020 under the combined influence of monsoon floods and the isolation and blockade policies of the federal administrative regions, while the recovery after the second quarter will depend on the recovery of demand,"
the report said.
The agency also said that entities with a larger proportion of rural operations are likely to do better because of the faster economic recovery. "Cement sales in the first quarter of India's fiscal year 2021 (April-June) fell by about 40% year-on-year, with companies with a higher proportion of rural customers and higher-profile individual housebuilders performing better,"
the report commented. From the perspective of high rural demand and abundant excellent labor force, the cement market performance in the central and eastern regions of India is more advantageous than that in the western region. After falling by 85% in April 2020, the year-on-year decline in
cement industry demand narrowed to 22% in May to 22% in June, mainly driven by rural areas. The Ind-Ra report even said that demand in the rural market will continue to outperform demand in the urban market in the coming months.
"The performance of the vast majority of large cement enterprises has recovered to 80% -90% in June 2019, and in fact, the performance of a few companies has resumed growth.". The recovery is driven by rural demand, as good rural demand is due to good spring crop growth in the countryside, abundant local labor and low transmission of COVID-19, the Ind-Ra report said.
The agency said a sharp increase in liquidity and lower variable costs at Indian cement companies in the first quarter of fiscal 2021 could cushion the decline in the company's earnings before interest, tax, depreciation and amortization (EBITDA/mt) per tonne. "Despite a 4% year-on-year decline in production, total EBITDA/mt of cement listed companies reached a record high of Rs 1,030 per tonne in FY20, compared to Rs 809 per tonne in FY19, driven by higher liquidity," the
report said. And cost management capabilities are better than the high level before fiscal year 2008. Most ongoing capital expenditures will be delayed by three to six months
due to labor shortages. However, Ind-Ra expects that about 65% of its capital expenditure in fiscal year 2021 will be in service, given that most of it is at a late stage.
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