The Economic Times
26 April 2017
The slowdown in the cement sector will be arrested and demand could grow by 4-6 per cent in the next fiscal, according to UltraTech Cement Managing Director KK Maheshwari. In an interview to Rajesh Naidu and Baiju Kalesh, Maheshwari said the drivers of growth will be low-cost housing and infrastructure. Edited excerpts:
The cement industry has been de-growing over the last few years. When do you see a reversal?
In India, fundamentally very interesting themes are emerging which are similar to countries which have grown faster than us. Take China, for instance. Demand in the initial phase of growth was driven by growth in infrastructure, followed by growth in industrial and commercial segments. In India, today, the biggest demand driver is the government's thrust on infrastructure.
This is one interesting trend we are seeing and this trend, according to me, is likely to continue. The government's thrust on infrastructure is increasing, with the pace gaining in the construction of roads, highways and even irrigation, water supply and water management. These themes in the broad infrastructure theme are likely to play out well in the coming years.
When do you see cement demand picking up?
There are three components which would drive demand for cement. First, it is housing, which is 60-65 per cent of the total demand. Then there is infrastructure, which forms 20-25 per cent of the total demand. And the remaining demand comes from commercial and industrial sectors. What we have observed is that in whichever areas infrastructure has done well, the housing segment has also done well. In the commercial/industrial segment, it is a matter of time that cement demand will pick up. The demand momentum is there. It is a bit scattered now. In certain regions, the growth momentum is quite high. In the east and the south, cement demand momentum is quite high, thanks to a pickup in the infrastructure segment. There has been reasonable demand growth from the roads segment in Maharashtra. In the next year, we can expect 5-6 per cent growth in cement demand.
In April, cement prices have seen the steepest rise. Is this rise sustainable and does it mean that you prefer more margins over volumes?
UltraTech is a premium brand and we have positioned our brand in a different category. As far as volumes are concerned, we would like to maximise it. Volume is a function of overall growth in demand. Overall, the industry has been de-growing. When the whole industry is in degrowth phase, there is little scope for growth in volume. But on a quarter-on-quarter comparison, we have clocked healthy volume growth of 18 per cent.
Given this, the strategy of preferring margins over volumes is a function of demand. If demand is high, only then one can we have significant growth in either of the parameters. We need to look at price hike in the context of cost of cement production. Per tonne cost of pet coke was about $40 last year. Today, it is close to $100 per tonne. So input costs have gone up. Fuel costs account for a large part of expenses in cement production. Per bag cost of fuel (depending upon the fuel mix) has gone up in the range of Rs 10-15. This is a significant increase.
Diesel prices have gone up. These cost factors have been instrumental in price hikes in recent months. We need to understand a key factor here that fundamentally the return on capital employed in cement industry is not more than 13 per cent, which is not that big. So, I think one should not give undue attention to price hike. Instead, the focus should be on how efficiently cement companies improve their fundamental cost structure.
Will the government's decision to spend from April and push its 'housing for all' agenda be a major driver of growth in cement demand?
Yes. Since the Budget date is advanced, the government has full 12 months to spend. Certainly, this is a big advantage in terms of creating sustained cement demand. We have observed that in the past one year, the low-cost housing segment has done extremely well. We found that all India cement consumption in low-cost housing segment has gone up by 40 per cent to 20 MT.
One has to view this in the context of 170 MT cement demand from the housing segment. Low-cost housing started off from a small base and the government gave it a big push. And this is reflected in the increase in cement consumption in the housing segment. The government is more focused on implementation of low-cost housing. In fact, last year low-cost housing was a saviour because other segments in the housing sector saw de-growth. This momentum in low-cost housing, I think, will hopefully continue in the coming quarters.
Dr. Pragnya RamGroup Executive President, Corporate Communications & CSRAditya Birla Management Corporation Private LimitedAditya Birla Centre, 1st Floor, 'C' WingS.K. Ahire Marg, WorliMumbai 400 030.
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