After a smooth start, the cement sector went through a bumpy ride during H2 in 2021 due to cost headwinds. Now, what lies ahead in 2022
Higher budgetary support for infra, healthy rural demand, benign interest rate and favourable low base aided strong demand growth during H1CY21 with volumes growing over 32% YoY (or growth 10.7% vs. pre-Covid levels). However, the growth momentum faded during H2 led by extended monsoon in major parts of the country along with sharp spike in prices of key inputs like petcoke/coal that eroded margins.
Barring a few hiccups from the Omicron wave, cement demand is expected to print a robust 9-10% growth in 2022 in our view vs. past five year’s average volume growth of 7.6%, backed by strong rural economy, pick-up in housing demand supported by lower interest rates and improved affordability. Additionally, strong execution in key government backed infrastructure projects like road, metros and irrigation segments in order to reach the target before the general election 2024 should drive the potential cement demand in 2022. While >84 MT new capacities are planned to be added over FY22-24E, these announcements are from major incumbents only and no new players are entering the segment. As the industry has seen meaningful consolidation over the past few years, we expect these new capacities, which are growing at ~4-4.5% per annum to easily get absorbed given the healthy outlook. In terms of costs, key input costs like imported coal and petcoke prices have now dipped 40% and 25%, respectively MoM after rallying sharply by 329% & 211%, respectively, during CY21. Further, excise cut on fuel (Rs. 10/litre on diesel, Rs.5/litre on petrol) along with support from cement price hikes of 5-7% across regions should help cement companies mitigate the incremental cost pressure and recoup lost margins during 2022. Overall, we maintain our positive stance on the sector for 2022.