Real Estate

Government spend on infra projects will lay the foundation for revival

Suresh P Iyengar Mumbai | Updated on January 04, 2021

Companies battered by Covid too loosen purse strings to add momentum

The sharp recovery in cement demand in last few months is expected to sustain in the near term with the government’s resolve to spend on public infrastructure such as roads, bridges and ports to boost economy hit by the Covid pandemic.

The government is not only awarding fresh contracts to private parties and generating jobs, but also paying contractors on time to ensure that labours salaries are not delayed and liquidity reaches bottom of the pyramid.

As of November, the government has borrowed ₹9 lakh crore to ensure that infrastructure spending does not suffer for want of funds. The National Infrastructure Investment Fund is also in talks with sovereign funds that have shown interest in investing in infrastructure projects in India.

As per government estimates, India requires investment worth ₹50 lakh crore in infrastructure over the next two years for sustainable economic development in the country.

Given the potential of government spends and expectation of revival in real estate sector, large cement companies such as UltraTech Cement, Ambuja Cement, ACC and JSW Group-owned Shiva Cement have lined up an investment of ₹7,800 crore over next three years.

The country’s largest cement company UltraTech alone will invest ₹5,477 crore to expand its capacity by 12.8 million tonnes per annum in the east, central and north regions by the financial year 2022-23.

Keshav Lahoti, Associate Equity Analyst, Angel Broking said cement demand is also picking up in non-trade segment due to increase in real estate and infrastructure activity.

Even in the few metro cities, real estate demand is better than pre-Covid levels as labourers are coming back to work as the festive season is over and fear of coronavirus has subsided, he added.

Pandemic impact

While the future looks bright, the Covid pandemic has caused a havoc on cement industry. Cement production in the country had fallen 22 per cent in the first seven months of this fiscal to 148 million tonne against 189 mt logged in the same period last year, largely due to production disruption due to Covid outbreak in April.

The drop in output was largely to 83 per cent dip in cement production in April to 4 mt against 29 mt in the same period last year. Covid pandemic outbreak had forced the government to announce a nation-wide lockdown. The strict restrictions on economic activities amid lockdown had come during the peak construction activities.

Capacity utilisation of domestic manufacturers has been around 47 per cent in the seven months ended October as units have been operating at sub-par capacities along with staggered shifts.

However, production has been increasing steadily touching 27 mt in October against 24 mt logged in November and 21 mt registered in October, 2019.

Price hike

The lower capacity utilisation has led to steady rise in cement prices forcing the Builders Association of India write a letter to Prime Minister Narendra Modi. The Association has expressed serious concern on high cement prices derailing the ongoing infrastructure projects.

Following this, the Competition Commission of India ordered fresh investigation into cartelisation in the cement industry. Incidentally, this is the second cartelisation investigation against the cement industry.

Way back in 2016, CCI had initiated a similar investigation against cement companies on back complaint by the Builders Association of India and levied a fine of ₹6,300 on 11 cement companies. The case is now being heard by the Supreme Court.

Cement prices in Mumbai and Hyderabad was up 10-14 per cent while it jumped 20-25 per cent in Delhi, despite a slight decline during the monsoon season even as concern on demand remained.

Despite weak demand, cement companies have posted a healthy growth in net profit on the back of lower cost of operations. Though sales of 41 top cement companies fell by 12 per cent in the first half of this fiscal and their net profit was up five per cent on the back of 15 per cent dip in total expenditure.

Published on January 04, 2021

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