On the road to recovery

Business activity had begun grinding to a halt a few weeks before the nationwide lockdown imposed on 25 March, due to the COVID-19 pandemic, adding to pressures on an already slowing economy. The April lock-down hit all eight infrastructure sectors, leading the core sector to contract by a record 38%. Cement output nosedived by 86% in this month, while fertilisers and crude oil output shrank by 4.5% and 6.4%, respectively.

This dramatic decline of 20% to 266 million t was due in large part to the massive impact of the pandemic and the resultant necessary lockdowns to contain its spread. Although, construction activities were declared essen-tial, many projects in the first weeks of the lockdown in late March were shut completely. After reopening, they faced a challenging scenario that included lack of workers, reduced temporary demand for new housing, and financial pressure.

As the first quarter of FY20 – 21 ended, the impact of the pandemic was felt across all Indian economic sectors. India’s April – June quarter GDP dipped 23.9% y/y, recording the first GDP contraction in more than 40 years. The contraction in economic activity reflected broad-based weaknesses in many industries, with construction, manufacturing, hotels, and transportation sectors suffering the most.

Quarter-on-quarter, the mining sector contracted 23.3%, while manufacturing activity decreased by 39.3%. Construction growth fell by 50.2% in the period and trade, hotels, transport and communication fell by 47%. India’s economy, however, does stand to benefit from the large decline in global crude oil prices, both as a result of the pandemic and the unexpected oil price war that broke out between Saudi Arabia and Russia in the beginning of March to decide the directional control of global crude price trends. India, as a major oil importer, and the low prices of crude will provide the economy with a boost akin to a stimulus.

In May, the Prime Minister, Narendra Modi, announced an INR 20-trillion stimulus package for vulnerable sections of society and small businesses. Many of those measures, however, had been announced earlier, and included fiscal support, monetary support, ease of doing business processes, as well as some reforms. In FY20 – 21, fiscal deficit is predicted to rise to 13% of GDP. The GDP and construction sector are expected to rebound as the economy opens up and lockdowns are lifted, as there is still pent up consumption demand and the contraction that occurred in the economy was forced as opposed to structural.

Construction

Following an unprecedented contraction of over 50% in the first quarter of FY20 – 21, the Indian construction industry is projected to decline by 14.9% this year. In the next year, it is expected to post a sharp rebound and grow by 11.6% in FY21 – 22.

Housing sales also dropped by nearly 30% in Q1 2020 y/y. The budgetary allocation by the central government for FY2020 – 21 for the construction sector declined by 7% y/y, however the proportion of gross budgetary support increased to 41% of the total budgetary allocation in FY20 – 21 from 35% in FY19 – 20.

The construction industry in India has an industry size of INR 10.5 trillion. Prior to the March lockdown, there were 20 000 ongoing construction projects in the country, according to the Confederation of Real Estate Developers Association of India. Work was undertaken in as many as 18 000 sites. The unavailability of workers, the majority being migrants, coupled with the rising cost of materials were additional blows.

Investment in hotels, restaurants, malls, theatres and cinema halls, offices, and educational buildings is likely to suffer in the short-term with the COVID-19 crisis. Higher unemployment along with uncertainty in the economy are also likely to affect the residential market. Private equity investment in Indian real estate dropped by around 85% y/y in the January – August period of this year, at around INR 6500 crore.

After June 2020, construction activities resumed in a phased manner. The Reserve Bank of India’s announcement on lowering interest rates, the reduction in stamp duty and registration charges in many states, and the six months loan moratorium, are an additional push to the sector.

In December 2019 India’s Finance Minister announced the five-year-long National Infrastructure Pipeline (NIP), in which the government intended to invest INR 111 lakh crore (more than US$1.2 trillion) on infrastructure projects across various sectors by FY2025. Roads, energy and railways were to be major components in the investment plan.

Of the investment pipeline, 40% of the projects are under implementation and the rest are at various stages. According to the Union Urban Development Minister, 15 more cities are likely to take up metro works. In Mumbai, other than the Metro, the mammoth coastal road project has begun. The Mumbai Trans Harbour Link (MTHL) will connect a rather disengaged area of Navi Mumbai with the mega city. A new airport in Navi Mumbai is also being constructed. Many other projects are spread all over the country and include those in Bengaluru, Varanasi, Hyderabad, Amravati, Patna, Bhubaneshwar and a score of other metropolitan cites and beyond. In the meantime, progress continues on the PMAY scheme, under which 8.5 million housing units are expected to be built by 2022. A transshipment terminal at Great Nicobar island, one of the Andaman and Nicobar Islands (ANI), has also been planned by the government, at a cost of INR 100 billion.

UltraTech has consolidated its position as the largest cement manufacturer in the country by taking over Binani Cement. The deal was protracted by a legal battle with Aditya Birla Group over the terms of the tender. The combination of ACC and Ambuja Cements, both owned by LafargeHolcim, puts the latter in second with the combined capacity to produce 61.4 million t.

In 2019, capacity utilisation rates remained healthy, at 72%, enough to incentivise companies to release new expansion projects. Shree Cement is looking to add two new grinding units, with one in Jharkhand and another in Odisha. Similarly, JK Cement is adding two grinding units, each with the capacity to produce one million tpy of cement, to its Nimbahena and Mangrol plants. Expecting an increase in demand from the central and north regions, India Cements wants to build an integrated cement plant in Madhya Pradesh and a grinding unit in Uttar Pradesh, boosting its capacity from the current 16 million t to around 20 million tpy, and turning the company into a pan-India player. Finally, Ramco Cement is currently developing the Kurnool greenfield integrated cement project, expected to be completed by first quarter of 2021, increasing its capacity to around 20 tpy.

Year-to-date, cement companies in India have experienced an improvement in realisations thanks to a series of sustained price hikes. Demand was not the key driver for these increases, especially in north and central India. Rather it was a combination of regional capacity consolidation and higher clinker utilisation. Furthermore, producers in north and central India are largely retail-focused and, therefore, major producers of PPC cement (fly-ash based). This has resulted in low input cost increases as cement kilns in the region are operating at high utilisation rates. WHRS based low-cost electricity availability is the highest here and, consequently further boosts margins.

Cement remains in the upper slab of the Goods and Services Tax, attracting a tax rate of 28%, together with some automobiles and luxury items. While manufacturers have hopped for the Union government to reduce the tax rate from 28 to 18%, the government seems unwilling to lose that revenue source and has maintained the tax rate after promising several times to reconsider it. However, the outlook for 2021 and beyond remains strong as there is sustained government support to all major infrastructure projects. In addition to the estimated US$1.2 trillion dollars allocated for infrastructure from 2020 – 2025, the government has given an additional stimulus to combat the after-effects of the pandemic on the construction sector.

Perspectives on India’s potential demand scenarios

In an optimistic scenario, the total decline in cement consumption may perhaps be mitigated to around 10% this year on the back of an emerging recovery in the third and fourth quarters of the year, and return to robust levels of growth over the forecast period with a general election in 2024, sure to elicit large scale construction activity. In the short-term, another round of fiscal stimulus is reportedly in the works and is expected to be focused on boosting consumption – this could be presented before the end of the calendar year. Additionally, the isolation of a successful coronavirus vaccine and its distribution in 2021 would go a long way to improving consumer and business confidence and construction investment from the private sector.

On the flip side, should the expected economic recovery in the other sectors of the economy not take root as expected, demand could in fact contract by 30% y/y due to rising unemployment, end of the loan moratorium interest period, and a sustained level of coronavirus cases negatively impacting consumption behaviour. The lack of a coronavirus vaccine will hamper growth prospects over the forecast period resulting in India’s forecast cement consumption in 2025 to be below 2018 levels. This scenario does take into account the general accelerated level of spending that occurs a couple of years before a general election scheduled for May of 2024. Nonetheless, even in CW Research’s conservative scenario, cement demand is estimated at approximately 300 million t in 2025.

About the authors

Robert Madeira is the MD and Head of Research at CW Group. He holds an MBA from the Harvard Business School and a triple-major from Brown University.

Prashant Singh is the Associate Director at CW Group and is responsible for providing business insights for CW Research and aiding in advisory project implementations. Prashant holds Bachelor’s Degrees in International Business and Economics from Saint Peter’s University and a Master of Science in International Business from Seton Hall University, USA.

Carolina Pereira is Manager of Advisory & Research at CW Group. She coordinates CW Research team activities and is involved in advisory project execution across an expanding industrial footprint. She has a Management Degree from Coimbra Business School, Portugal and heads the Porto office.

Juliana Veira is a Business Analyst at CW Group. She implements quantitative analysis for CW Research’s syndicated products catering to the building and heavy industry. Juliana has experience in the cement industry and holds a degree in International Relations from ESPM, Rio de Janeiro, Brazil.

Wanderson Texeira is a Junior Business Analyst at CW Group. Wanderson assists in the execution and collection of qualitative analysis for CW Research’s product portfolio and holds a degree in International Relations from La Salle University, Rio de Janeiro, Brazil.

Read the article online at: https://www.worldcement.com/indian-subcontinent/13012021/on-the-road-to-recovery/