Clearing stalled projects will boost demand

Suresh P Iyengar Mumbai | Updated on March 12, 2018 Published on June 10, 2014

Releasing payments, making capital access easier will help cement makers

The cement sector will be the first to bounce back if the positive business sentiment attributed to the Modi Government turns into real growth in GDP. Cement companies have long been pressured by rising input cost and falling demand.

Infrastructure projects, which account for about 60 per cent of total cement demand, have been stuck for want of clearances and funding. Anticipating a sharp rise in demand, cement companies had enhanced production capacity to about 360 million tonnes from 340 million tonnes in the last three years. Unfortunately, demand in this period failed to keep pace with the capacity addition due to economic slowdown and the government's policy paralysis. With large scale capacity addition and low demand, the cement industry capacity utilisation has averaged at about 70-75 per cent last fiscal.

Companies had to cut capacity utilisation to maintain price levels and pass on the incremental cost overrun due to hike in power and fuel costs. Traditionally, the rate of growth in demand for cement is 1.2-1.3 times that of the GDP. Interestingly, in the last few years, demand has lagged behind GDP growth because the GDP was largely driven by the agriculture sector and not manufacturing or infrastructure activities.

Changing government focus

While GDP growth was about five to six per cent in last two years, cement demand grew at just three to four per cent. The industry is expecting pent-up demand to materialise as the new Government focuses on infrastructure projects.

The Government has planned a two-pronged strategy to deal with infrastructure projects stuck at the last mile. It has asked ministries connected with giving approvals for infrastructure projects to expedite clearances. The Finance Ministry has been asked to smoothen the process of accessing capital for projects.

The Finance Ministry is also working to ensure that all payments due to private companies are released and all stalled projects are revived. This thrust on infrastructure will help cement firms stuck in debt's quagmire. Prime Minister Narendra Modi’s stated policy of ‘minimum government, maximum governance’ has instilled new confidence in investors.

Daljeet S Kohli, Head of Research, IndiaNivesh Research, said more that than financial concessions, cement companies will benefit from a revival in the investment cycle.

The key challenge of low demand and rising costs has made cement companies more efficient. Once demand starts picking up, companies would turn around fast, he said.

Even if the Government does no given in to all of the industry's demands in this Budget, just a revival in pending infrastructure projects, estimated at being worth ₹7.5 lakh crore, will be enough toreignite the space and attract fresh investments.

Published on June 10, 2014
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