The Indian Cement Sector Hopes for a Better 2018
India, the 2nd largest cement producer in the world, at present is going through a growth phase, with it major players like UltraTech cement acquiring the cement business arm of JP Associates for INR16,189 crore. With respect to market demand, there’s been quite a slowdown following RERA implementation and demonetization.
Cement production is expected to have risen by 4.5% in FY 2015-16. In the FY 2016-17, the growth in production is estimated to accelerate to 7.9% supported by an increase in demand from construction and infrastructure sectors. A number of infrastructure projects are proposed to be developed in the forthcoming years.
Financial Year 2017-2018
According to the reports from some of the leading brokerage houses in the country, cement prices have increased across the country by end of June quarter, which is likely to boost the top line for the cement establishments. On QoQ basis, Eastern India saw 12.8% and the western region witnessed 16.5%, reflecting the highest increase in last few quarters. Central and Northern India also witnessed price hikes 4.6% and 7.3%, respectively; however, the Southern part of the country improved barely 3.1%.
Initiatives by the Central Government
The cement industry is projected to grow over the next couple of years reinforced by the augmented spending by central government on the infrastructural projects and revival in rural demand. Also, the Swachh Bharat scheme, smart cities projects, and rapid urbanization could be the catalyst for boosting demand. Moreover, the investment of INR 64,900 crore by the Indian government on Highways and INR 29,000 crore on Road Transport would elevate the demand in the next fiscal. Also, the decision of the government of shifting from bitumen to cement for the purpose of construction of all the impending projects would influence the Indian cement industry positively. This decision was taken after taking into consideration that cement is more cost effective and durable and the move would benefit the Indian cement companies in the medium term as well as long-term.
Road Ahead: Outlook for 2018
The outlook for Indian cement companies for fiscal 2018 appears to be good with increasing profitability and strong pricing. The sector is principally driven by higher valuations factoring in the considerable development in profitability and increasing the risk supplementary to demand growth, particularly from the real estate sector.
The Indian housing sector that contributes roughly 67% to overall demand for cement in the country, is expected to grow in 2018 and spill over next few years, supplemented by growing urbanization and relaxed norms for availing home loans. Owing to the increasing demand across sectors like housing, industrial construction, and commercial construction, the Indian cement industry is projected to reach 550-600 MTPA (Million Tonnes Per Annum) by 2025. Recently, the government of India announced GST rate of 28% for cement, while the current tax rate is 24%. This increase in tax rate might lead to increase in prices. However, the lower freight cost and reduced tax on the transportation sector might benefit the cement industry. The industry could also benefit from the 5% reduction in the tax rate on metal and coal.
The country’s eastern states are likely to be the newer and untouched markets for the cement companies and might contribute to their top line in days to come. Down the line in next 10 years, India can become the chief exporter of gray cement and clinker to Africa, Middle East, and several other developing nations globally. Cement manufacturing plants nearby ports, for example, the plants in Visakhapatnam and Gujarat, would have an additional benefit for exports and would logistically be well equipped for facing hard competition from manufacturers in the inner part of the country.
Foreign Investors Eyeing for an Opportunity
A number of foreign players are also anticipated to enter the Indian market, due to steady demand and the profit margins. In future, domestic cement companies might go for the global listings through the GDR route or FCCB route. With help from the government in terms of friendlier laws, lower taxation, and increased infrastructure spending, the sector will grow and take India’s economy forward along with it.
The Bottom Line
Certainly, with lower taxation, friendlier laws and increased spending on infrastructure, the industry would grow and help country’s economy in moving forward. The Indian cement industry is anticipated to grow at 5%-6% CAGR (Compounded Annual Growth Rate) between 2017 and 2020. Moreover, the continuing investment in infrastructure and power sectors is also likely to lift demand growth.