Market Wire: Cement Demand To Register Single-Digit Growth FY17
Demand for Cement to grow by 4%-6% in FY17, double the growth registered in 2015, on the back of government spending in the construction and infrastructure segment, says India Ratings and Research (Ind-Ra). Cement demand has registered a single-digit growth rate in the last six financial years, with the weakest growth in the decade of 2.2% during April-December 2015. Ind-Ra estimates cement demand to grow by 3% in FY16E compared to 5.6% in FY15.
Ind-Ra’s FY17 Outlook for Cement Manufacturers, expects the improvement in demand in FY17 on the back of a slightly better demand from the construction and infrastructure segments led by government spending. However, since Ind-Ra does not expect any significant revival in housing demand in either rural or urban areas, the overall cement demand growth will be in a mid-single digit. The agency has revised down its demand estimate for FY16 to around 3% from 6.5%-8.0%. Ind-Ra expects a pick-up in demand growth in the rest of FY16 (compared to 2.2% in the first 9MFY16) as it would be on a much lower base in 4QFY15 (negative 0.4%).
Cement demand in FY16 was weak due to the slowdown witnessed across key demand drivers, rural housing (around 40% of cement demand), urban housing (20%-25%) and construction/infrastructure/industrial activities (around 25%). Commercial real estate accounts for 10% of the cement demand. The growth rate so far in this fiscal year was also impacted due to the high base in the corresponding period last fiscal year. Cement demand grew 8.4% during April -November 2014 (FY15: 5.6%).
Urban housing demand has been affected by continued affordability issues and weak consumer sentiments. Rural housing demand was impacted due to an economic slowdown in rural areas because of the poor monsoon as well as subdued increase in the minimum support price for agri-products over the last two years. Execution in the construction/infrastructure segment was also affected due to stretched balance sheets of many large construction/ infrastructure players and banks’ cautious lending approach to this sector. The reduction in bank loan book growth to commercial real estate sector has been partly offset by funding from non-banking financial companies and private equity players.
Historically, the drivers of cement volumes have been infrastructure, construction and real estate activities. Cement volume growth shows varying correlation with each of these segments. Bank credit growth has been used as an indicator of activities in these three segments. The moderately high correlation of close to 0.6 between cement growth and bank credit growth for the construction and commercial real estate sectors indicates that activities in these sectors are possibly the key drivers of cement growth.
Ind-Ra does not expect any significant recovery in rural housing demand in FY17 due to the aftereffects of FY16’s weak monsoon and subdued growth in minimum support prices for agri-products. Similarly, it does not expect any significant pick-up in urban housing demand as the real estate sector across major six cities (except Kolkata) is still ailing with high inventory levels. High inventory levels are already resulting in developers reducing new project launches in line with absorption/sales rate. Ind-Ra expects real estate developers to focus on project completion and consolidate their balance sheets in the near term. Completing and delivering projects is also important for these developers to win-back customers confidence.
Given the government’s focus on roads and highways, Ind-Ra expects cement demand to be supported by an up-tick in National Highways Authority of India (NHAI; ‘IND AAA’/Stable) activities and better demand from the construction/infrastructure segments led by government spending.
In the first 8MFY16, Government’s plan and non-plan expenditures under key ministerial heads, which are likely to drive construction/infrastructure activities, were up by 18% yoy on the back of the 48% yoy growth in roads/highway expenditure and 25% yoy growth in urban development expenditure. Around 70% of the budgeted amount for FY16 was already incurred during April-November 2015 while the FY15 full-year expenditure was only 80% of the FY15 budgetary expenditure under these key ministerial heads. During April-November 2015 the government’s capital expenditure increased by 31% yoy. Ind-Ra expects construction gross value addition growth to improve to 4.7% in FY17 from the estimated 4.0% in FY16 (FY15: 4.8%). Historically, cement growth has been in line with the growth in the construction gross value added.