Ind-Ra opines April 2021 is likely to have seen a sequential moderation of around 10% owing to the dual impact of the second covid wave led state lockdowns and a strong March base. As restrictions intensified due to rising cases, May 2021 is likely to have seen a decline of around 25% compared to March 2021. However, with a gradual easing of lockdowns and pre-monsoon pent-up demand, June is likely to have registered sequential growth of around 20% despite rains affecting construction in some parts of the country, resulting in 35%-40% yoy growth in 1QFY22 on a low base. Cement volume transported through rail witnessed an increase of 22% month on month in June 2021.

The listed universe, that generally accounts for 75%-80% of the total industry volumes, reported flat volumes in FY21 despite a 30% yoy decline in 1QFY21. Volumes during 4QFY21 were 9% higher than 4QFY19 (the last normal 4Q), indicating meaningful growth, led by a strong rural housing and infrastructure demand. Capacity utilisations hit 89% in 4QFY21 (4QFY20: 74%, 4QFY19: 88%), which in conjunction with higher clinker utilisations indicates that nearly the entire effective capacity was used up during the quarter. Capacity utilisation for the listed space came in at around 70% for FY21, down 200bp yoy. The eastern region continued to lead in FY21 while the southern region was a mixed bag and the western region deteriorated sharply.

Profitability remained strong in 4QFY21 aided by an increase in realisations as well as a moderation in costs. The strong EBITDA/mt coupled with flat volumes led to 21% yoy growth in sector EBITDA in FY21. South-based companies led the pack, with strong realisations leading to EBITDA growth of more than 100% for companies such as Deccan Cements (125% yoy), Sagar Cements (‘IND A’/Positive; 116% yoy) and NCL Industries (103% yoy) on a low base.

However, with a continued increase in pet coke, coal and diesel prices, cement companies are likely to see a moderation in EBITDA/mt in 1QFY22. Coal prices in 1QFY22 were nearly 50% higher than the FY21 average while pet coke prices were 40% higher. Diesel prices were up 20-25% yoy in 1QFY21 and around 15% higher than FY21 average. The increase in commodity prices is likely to lead to an increase in power and fuel as well as freight and forwarding costs as companies gradually exhaust their low-cost inventory. Besides, the prices of fly ash and slag have increased in the past couple of quarters. While most companies are setting up waste heat recovery systems to structurally reduce power cost as well as reliance on external fuel purchase, EBITDA/mt is likely to moderate in the next couple of quarters.

Cement realisations averaged 2% yoy higher in FY21 on a pan-India basis while the prices were strongest in South with a yoy increase of 9%-16%. Despite a higher demand, Eastern region witnessed a decline in realisations with the influx of supplies. Ind-Ra believes realisations in 1QFY22 have been higher sequentially despite the impact of second wave. Price hikes were taken in most regions in June 2021 though reports indicate partial rollback in many pockets except North. While the increase in input costs is likely to prevent cement companies from reducing prices significantly, the seasonally weak second quarter ahead could make it difficult to sustain prices.

Cement companies saw a significant release in working capital mainly led by an increase in payables and a reduction in inventory as companies tried to optimise management of funds during the pandemic. Aggregate net working capital fell 31%yoy in FY21 as payables increased by 16% yoy and inventory and receivables declined by 6% yoy and 3% yoy, respectively. This led to a release of Rs 30.2 billion for the listed universe. Companies such as JK Lakshmi Cement and Sagar Cements saw net working capital turning negative in FY21. The sector’s net working capital reduced to 5% of the revenue in FY21 (FY20: 7.3%, FY19: 8.2%). Ind-Ra, however, believes the net working capital of the sector would increase in FY22, led by revenue growth as well as some decrease in payables as operations normalise and companies try to optimise procurement costs. An increase in non-trade sales could also lead to an increase in the receivables. However, the net working capital ratio is likely to remain better than the levels witnessed in FY19 and FY20.

With the strong growth in EBITDA and reduction in working capital, the net leverage improved for most cement companies. Net leverage of the listed universe improved to 0.4x in FY21 (FY20: 1.1x, FY19: 1.7x). Despite most entities expanding their capacities, Ind-Ra expects sector deleveraging to continue on the back of strong cash flows.

FY21 saw capacity additions of 14.4mnt, of which capacities of 10.7mnt were commissioned in 4QFY21 as labour shortage and cash conservation limited the progress in 1HFY21. The quick recovery and low additions in the past couple of years fuelled capex plans with a supply pipeline of around 70mnt over FY22-FY23, which is the highest ever two-year addition since FY11. While the second wave has pushed completion timelines by a couple of quarters for most companies, it has not led to any capex deferral nor has it deterred companies from announcing medium-term expansion targets. Heidelberg Cement India (IND AA+’/Stable) announced its plan to set up a 3mnt greenfield plant in Gujarat which will be operational in three years while Prism Johnson (‘IND A+’/Stable) announced its plan to further increase capacity by 1mnt at Satna plant, Madhya Pradesh by September 2023 in addition to debottlenecking (0.9mnt) by June 2022. Ambuja Cements plans to increase its capacity to 50mnt in the medium term (from 29.65mnt currently), indicating large capex to be undertaken after the Marwar-Mundra project that would create potential for additional 5mnt. JK Cement (‘IND AA+’/Stable), intends to increase capacity to 25mnt over the next five years (from 14.7mnt currently).

The divergence in cement volume growth as per the monthly data published by the Department of Promotion of Industry and Internal Trade (DPIIT) and the results of the listed universe has increased significantly post the outbreak of COVID-19. According to the core industries data published by DPIIT, volumes declined 11% yoy in FY21 while the sales of listed universe remained flat. For that to be true, the unlisted space has to have shrunk by 51% yoy which appears improbable given that large unlisted players that accounted for around 50% of the unlisted share in FY20, have witnessed flattish volumes in FY21. Even if we assume the balance 50% of listed space shrunk 25%-30% yoy, the sector decline works out to 2.5%-3% yoy for FY21. However, the DPIIT reported numbers in April/May 2021 indicate a decline of 11%-26% over March 2021, and appear to be in line with the actual industry trends.