Indian cement companies' growth for 2019-20 supported by infrastructure and housing

India's top four cement companies showed an overall increase in profit and sales for the period, due to healthy demand and a rise in prices

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It's election year for India, and the cement industry shows it: the government has ramped up its efforts in infrastructure and in the affordable housing program, which is leading companies to have an optimistic outlook for the coming financial. Another reason behind Indian cement playersÔÇÖ confidence is their results for the 2018-19 fiscal, which displayed a healthy growth across key financial performance indicators.

While there were some headwinds from the tightening competition, the rupee depreciation and the rise in energy costs, major cement producers have reported an overall growth in their yearly or quarterly reports, and remain well-positioned for growth in 2020.

Note: ACC and Ambuja Cements have their financial year in accordance with the calendar year, while UltraTech and Birla follow the Indian fiscal year, which starts April 1, and ends March 31.

Proof is in the profit

ACC's profit before tax in 2018 reached INR 1,494 crore, compared with INR 1,298 crore in 2017, in part due to an 8.2 percent rise in cement volumes sales, which reached 28.4 million tons. Net sales for the period reached INR 14,477 crore, increasing as well from the previous year, in which they stood at INR 12,909 crore.

Capacity growth will be the company's focus in 2019, which aims to add 5.9 million tons of cement capacity in a new greenfield investment in Madhya Pradesh, as well as a new grinding unit in Uttar Pradesh, coupled with the expansion of its Tikaria and Sindri plants over the next three years.

Ambuja's net sales stood at INR 10,977 crore in 2018, expanding from INR 10,250 crore in 2017. Operating EBITDA declined mildly from INR 1,940 to INR 1,891, and overall cement production stood at 24.3 million tons, improving by 5.9 percent year-on-year.

Domestic sales volumes rose by 5.4 percent to 24.2 million tons in 2018, and the company also increased its use of alternative fuels to 5.5 percent during the year, to counteract higher fuel and energy prices.

UltraTech's net sales rose by 21 percent in fiscal 2019 reaching INR 35,105 crore, from INR 28,930 crore in the previous year, while profit grew from INR 6,482 crore to INR 6,992 crore. This is the second consecutive year that the overall cement industry has achieved a double-digit growth, as demand has been increasing.

The company has continued its expansion program during the year, having closed Binani Cement's assets. Since the acquisition closed, capacity utilization and other quality concerns are being upgraded, and the company hopes to launch its own brand from the acquired facilities soon. Earnings from previous acquisitions continue to grow, and further investments in these are planned.

Total income for Birla reached INR 6,627 crore during the fiscal, expanding from the INR 6,012 crore achieved in the previous fiscal. Profit also recorded a healthy growth during this period, from INR 5,840 crore to INR 6,309 crore. Cement accounted for a healthy amount of these gains, with revenue for the segment reaching INR 6,215 crore in FY2019, compared with INR 5,628 crore in FY 2018. Profit also increased from INR 503 crore to INR 671 crore.

Outlook for FY20

Companies are expecting good growth for the current fiscal year, backed by an expected strong improvement of around 7.4 percent in the Indian economy, and the Union government now committing to further strengthen infrastructure initiatives. Both the government and private investors helped to boost overall cement consumption growth in 2018-19, with the factors from this rise to spill over into the next fiscal year and to aid the sector further.

Cement demand grew during 2018-19, and is expected to continue its upward trajectory in the coming year, mainly driven by the Eastern, Central, and Northern regions. The government is playing a key role in these developments, as not only is it focusing on developing infrastructure such as concrete roads, metro rail networks, airports and irrigation projects, but is also proposing an affordable housing program.

As the housing sector accounts for the majority of demand in India, consuming about 65 percent of the total, this will also have a large impact on the cement industry during the year. While urban housing is seeing a pickup in demand, the overall growth is being seen in rural areas, where cement prices in the most recent months have also been increasing. This has also angered some real estate developers, who have called for the government's intervention, although that is only likely to happen after the elections, which took place on May 19.

The Goods and Services Tax rate on cement remains at 28 percent, which both manufacturers and end-users claim to be damaging for their business, but the government remains tight-lipped about any changes to it. While there are rumors that it could be reduced to eighteen percent, some are still skeptic, and uncertainty remains. If the government were to introduce changes to the tax rate, demand could rise even further, promoting growth in the sector.

Meanwhile, ICRA is expecting domestic demand to grow by eight percent during the fiscal, and to push capacity utilization to 71 percent, from the recorded 65 percent in FY2018. They also expect cement capacity to rise a further 18 to 20 million tons per annum, with most of it being focused on grinding, rather than clinker, meaning that actual production of new capacities could be lower.

This article originally appeared in ICCM 47