Cement demand growth is expected to be around 3.5%-4% during the current financial year, a downward revision against the earlier estimate of 5% as there has been a delay in the revival of cement demand during the first half of FY2018, ICRA said.
The demand is expected to rebound from Q3 of FY18, according to the ratings agency even as Q2 is expected to be muted owing to the monsoons and GST implementation issues.
“The demand in Q1 FY2018 was adversely impacted due to sand shortage (in a few southern and northern states), implementation of the Real Estate Regulatory Authority (RERA) and slowdown in the construction activity (in West) and drought and weak housing activity (in few southern states). Although the cement demand is expected to be muted in Q2 FY2018 on account of the monsoons and the GST implementation issues, we expect the demand to rebound from Q3 FY2018. The demand growth is likely to be driven by a pick-up in the housing segment - primarily affordable and rural housing, and infrastructure segment - mostly road and irrigation projects,” Sabyasachi Majumdar, senior vice president at ICRA Ratings said.
On the pricing front, July and August saw a decline in prices in most markets, with prices dropping by 4% - 8% in August, 2017 as compared with June, 2017. However, prices are expected to rise as demand picks up in Q3FY18.
Further, given our expectations of higher power and fuel (increase in coal and pet coke prices) and freight costs (increase in diesel prices) during FY2018, the increase in cement prices remain critical from the profitability perspective. 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. In addition, rising costs continueto put pressure on the profitability margins and debt metrics of the cement companies,” Majumdar added.