Bharatmala project may not be a game changer for cement demand
Bharatmala project is at best a sentiment boost for the cement sector
{{^adFree}}
Business News/ Market / Mark-to-market/ Bharatmala project may not be a game changer for cement demand
The Supreme Court’s decision to lift the ban on petroleum coke (pet coke) usage for the cement industry was a short-term breather, as it was soon followed by a hike in import duty on pet coke from 2.5% to 10%.
{{^adFree}}
Escalating prices of both input materials—pet coke and coal—mean that operating costs would remain higher, leading to further margin compression.
In an attempt to reduce margin erosion, cement companies passed on this burden to consumers by hiking prices in December. A further increase of around Rs4 per 50kg cement bag is anticipated in January.
{{^adFree}}
But for prices to sustain at higher levels, a significant revival in demand is the need of the hour.
The housing sector is the largest driver of cement demand and accounts for nearly 65% of overall cement consumption. Within that, rural housing accounts for around 35% of cement demand and the rest is urban housing. This is followed by the commercial and industrial sector that accounts for nearly 20-25% of cement and around 15-20% is contributed by infrastructure projects.
Cement demand has remained subdued for quite some time now, adversely impacted by factors including continued sand shortage and labour unavailability in certain pockets of the country, implementation of the Real Estate Regulatory Authority (RERA) legislation that resulted in construction activity slowing down and extended monsoons. Thus, volume growth for the sector has largely been on the back of capacity addition (see Chart).
{{^adFree}}
According to domestic brokerage firm Prabhudas Lilladher Ltd, though cement demand is steadily growing at 6-7%, it is predominantly from the highly competitive and low pricing infrastructure and government-sponsored affordable housing sector. Demand from the high-margin and price-inelastic real estate/individual housing sector would take at least four-five quarters more to revive, it said in a report.
In such a scenario, the onus of boosting cement consumption remains on government spending on infrastructure and related projects.
And one such project is the ambitious Bharatmala, which was approved by the Union cabinet in October 2017. The government intends to construct about 83,677km of roads (45km/day), including those under the Bharatmala scheme, over the next five years. The programme will incur a capex of Rs6.92 trillion; of this phase-1 of Bharatmala will incur a capex of Rs5.35 trillion.
{{^adFree}}
Many cement stocks rallied in a knee-jerk reaction to this development, but some cement analysts are of the view that the Bharatmala project is unlikely to be a game changer for overall cement demand.
“Even if the entire phase-1 of Bharatmala that involves construction of 34,800km of roads is made of concrete, it would lead to an additional demand of 16 million tonnes. Let’s divide it by, say, four years of construction span; the incremental cement demand is 4 million tonnes per annum (mntpa). Now, contrast this figure with 420 mntpa in capacity of cement in supply. This simply means Bharatmala project is unlikely to result in huge cement demand boost. Also, it is worth noting that usually bitumen is used as material for road surfacing and if that is the case then cement is hardly of any use," Rohit Natarajan, an analyst at IDBI Capital Markets and Securities Ltd, said.
But not all is lost. A positive outcome could be that freight costs for cement manufacturers may reduce given better transportation connectivity and increased accessibility, analysts said. Freight and forwarding costs, which account for 21-25% of total operating costs of cement companies, continue to be on the higher side due to surging diesel prices.
{{^adFree}}
In short, the Bharatmala project is at best a sentiment boost for the cement sector.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.