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Govt's infra push is a boon for cement firms

Livemint:  October, 2015

Mumbai: Mumbai’s Bandra-Worli sea link project alone consumed 100,000 tonnes of cement. The central government now plans to expand the city’s airport, seaport and metro rail infrastructure. These projects, along with several others planned around the city, are expected to increase the demand for cement.

Analysts say the central government’s infrastructure push may help cement makers across India—particularly those in western India—utilize capacity better and realize higher prices in the long term.

Major infrastructure projects in the country worth Rs.3.47 trillion will need 45 million tonnes of cement in the next three to four years, according to a 13 October Nomura research report on the cement sector. Out of this, western India alone will consume 12 million tonnes.

“Infrastructure will surely give the needed push for demand, but that would come in only after a lag of six to 12 months,” said Amey Joshi, associate director (corporate), India Ratings and Research. Airports, seaports, national highways, state roads, dedicated freight corridor projects and several city metro projects are likely to contribute to this expected 45 million tonnes of cement demand, according to the Nomura report.

“At present, 20% of the total cement demand in India comes from infrastructure, which three to four years back used to be a 25% share. With the current emphasis on infrastructure development, we could see this share rising beyond 25%,” said a cement analyst from a domestic brokerage firm, who did not wish to be identified.

Several analysts peg India’s current cement capacity at more than 390 million tonnes, with an average effective capacity utilization of 70%. There is no industry body that compiles cement production data in the country. “If this infrastructure demand comes in, we could see the utilization level rise to about 80%,” said the analyst cited earlier.

Joshi from India Ratings says that once infrastructure demand trickles in, prices and utilizations will improve.

Of this, the western region is likely to gain the most, with 27% of the demand, according to the Nomura report, since many infrastructure projects are concentrated there. Cement manufacturers in eastern India and central India also stand to gain, with 24% of the demand coming from eastern India and 23% from central India.

Analysts Vineet Verma and Saion Mukherjee wrote in the Nomura report, “Recovery in utilisations on pan-India basis will be more gradual, but we prefer companies which are more exposed to non-south regions. We noted that, based on our bottom-up analysis, infrastructure spending in roads and railways, which are a key focus area for the government, is more skewed towards non-south regions. In view of this, coupled with higher capacity utilisations in this region, we expect pricing particularly in north/central regions will likely catch up with other regions.”

Infrastructure-driven demand growth is likely to be limited for the southern region, with just 9%, or 4 million tonnes, of the total infrastructure demand expected from the region, Nomura said. The current demand-supply mismatch is stark in this market, with utilization levels lower than the national average at 55%, according to industry experts.

However, some others, including Joshi from India Ratings, say a pickup in rural demand is essential for an overall demand recovery. Of the total cement demand in the country, housing and construction contributed more than 60%, of which rural housing demand is a big chunk. “Any robust cement demand growth is possible only when the demand growth from infrastructure is equally supported with a growth in rural demand,” said a second analyst from a domestic brokerage firm, who also did not wish to be identified.

Email queries sent to ACC Ltd, Ultratech Ltd, Jaypee Cement Corp. Ltd, Sagar Cements Ltd and Ramco Cements Ltd on 20 October remained unanswered.