Cement Industry Likely To Add 145-155 MT Incremental Capacity In 5 Fiscals: Crisil Research

Cement industry is likely to add 145-155 metric tonnes (MT) incremental capacity in five fiscals through 2027 was reported by Crisil in its research note. The rating agency has done an analysis on Indian cement sector and foresee the capex expansion.

India is the second largest global producer of cement and its demand is driven by the thriving housing sector (accounting for 60-65% of cement consumption) and continued investments in infrastructure.

According to the research note, "Indian cement makers have added substantial capacity - 217 MT - from fiscals 2013 to 2022. In the five fiscals through 2017, around 108 MT were added, and while in the next five fiscals through 2022, 109 MT were added despite pandemic-induced disruptions."

Post pandemic, the demand recovery was good and strong profitability helped producers deleverage. Delayed capex plans continued in the latter part of fiscal 2021. So fiscal 2022 saw the highest capacity addition of the preceding decade at 34 MT. This further increased India's total installed capacity for cement by ~61% to ~570 MT from 353 MT in fiscal 2012.

For the fiscal 2023, the, capacity addition is expected to moderate to 30-32 MT, inclusive of grinding and integrated units. This moderation and slowing capex is due to higher input costs, pointed out by Crisil. It is further expected that for 2024 fiscal as well the capacity addition would be flattish and nearly 30-32 MT addition would occur. The reason for such a flatline is because general elections would be held and it would lead to change in policies after forming new government.

Post that the capacity additions would gather pace as cement companies will go on expansion spree for the demand will rise, population continues to grow and government's infrastructure thrust would help. Cement companies are expected to go on an expansion spree, and add 145-155 MT of capacity between fiscals 2023 and 2027. That translates to 4-5% compound annual growth rate (CAGR) on a high base. A robust 6-7% CAGR expected in cement demand over this five fiscals will encourage the growth in supply.

From 2018, consolidation began with large producers led by Ultratech Cement going for more inorganic expansion, acquiring nearly 38 MT of capacity from mid and small companies. Consequently, their share in the capacity mix rose to 46% in fiscal 2022 from 39% in fiscal 2017.

It was noted that there was a wide gap in share of capacity addition between large and mid-sized producers - the former's share bulged to ~76% from 41% (including organic and inorganic expansions). On the other hand, the latter's contracted to ~19% from 50%, and their share of the capacity mix dwindled from ~44% to ~39% in fiscal 2022.

The top 5 large players include Ultratech Cement, Adani Cement (ACC and Ambuja), Dalmia Bharat, and Shree Cement. These 5 would drive a lion's share of incremental capacity addition over the medium term. The expected 145-155 MT of increased capacity over fiscals 2023-27 will entail a likely capital expenditure of ~Rs 1.2 lakh crore, with large producers accounting for more than half of the spending.

As per the research note, the key contributor for this expansion would be due to grinding as cement industry players prefer to install more grinding units nearer consumption centres in the past decade for better market reach and freight cost rationalisation. This would also roughly account for 60-65% of additional capacities being installed as against lower share of integrated units (35-40%).

Eastern India would dominate as the key region, largely on account of the rural housing and infrastructure boom and a favourable base. Inadequate focus on infrastructure and housing in the past have created room for healthy demand growth, noted the report.