India bets on robust demand
Over the last year, India’s economic growth decelerated. GDP has hit the lowest point in the last five quarters during the April-June 2024 quarter (see Table 1). Inflation, in particular retail inflation, continues to remain on the higher side, which is not enabling the central bank of India to cut interest rates. These saw a hike to 6.5 per cent in 2022 and early 2023. Meanwhile, higher input costs are putting pressure on the manufacturing sector’s profitability.
| Table 1: quarterly GDP growth in India, April-June 2023 – April-June 2024 | |
| Quarter | YoY growth (%) |
| April-June 2023 | 7.8 |
| July-September 2023 | 7.6 |
| October-December 2023 | 8.4 |
| January-March 2024 | 7.8 |
| April-June 2024 | 6.7 |
| Source: Office of the Economic Adviser, Government of India | |
Amid this, the country has one of the weakest governments at the centre since 2014. The Modi-led BJP managed to form the government in June after a long election process spread across the April-June period. However, it is precariously dependent on its regional allies. Without their support the party would fall far short of the required majority in India’s parliament.
Therefore, while the economic scenario appears cautiously stable, economists and market analysts have their concerns regarding upcoming economic growth, persistent high inflation and poor employment conditions. It is expected that by the end of 2024 or early 2025, the situation would improve and interest rates may be cut, which would boost the economy.
Meanwhile, India’s 580Mta cement industry, the world’s second largest, is struggling to keep the double-digit growth tag intact. The low base effect on the back of the pandemic did push its growth to above 10 per cent during 2021 and 2022. However, it slipped below eight per cent in 2023 and is likely to remain so in the current calendar year as well.
This uncertain demand scenario and weak pricing trend is putting pressure on cement makers. Interestingly, despite India being in the peak construction phase (November to June), the sector could see a double-digit growth only in March this year. The long general elections negatively impacted cement demand. Though the cement makers attempted to go ahead with price hikes, this proved unsustainable and they had to roll back price increases.
While in the year preceding general elections cement demand tends to remain quite robust, driven by government agencies that are rushing to complete the proposed infrastructure projects, this year turned out to be an exception. The average monthly growth since the end of monsoon last year until June 2024 has been dismal at less than three per cent.
Moreover, the monsoon’s geographical spread so far has been highly non-uniform and below the average. This has considerably delayed paddy plantations in various Indian states and therefore, the return on the planted crops. This may not help boost the rural demand for cement. Moreover, India is now entering the three-month festive season, which typically slows down construction activities due to labour shortages. By October 2024 cement makers may again attempt to hike cement prices. But whether these will be sustainable or not largely depends on how the demand scenario picks up in the post-festive season.
GDP, inflation and policy rates
GDP growth
India’s GDP growth for the April-June 2024 quarter hit a 15-month low of 6.7 per cent (see Table 1). This was lower than the Reserve Bank of India (RBI)’s estimate of 7.1 per cent and economists’ expectations of 6.9 per cent. A dip in GDP growth was mainly on the back of soft government spending and low consumer spending. During the April-June quarter, agricultural growth continued to be adversely affected by last year’s poor monsoon and heatwaves. Manufacturing slowed sequentially to a four-quarter low at seven per cent, reflecting the moderation seen in the industrial production data and corporate profitability. On the other hand, private spending accelerated to a six-quarter high at 7.45 per cent while government final consumption expenditure contracted marginally during the period.
Weeks before the release of the latest GDP numbers, India’s central bank kept the policy repurchasing option (repo) rate at 6.5 per cent for an eighth consecutive meeting since early 2023. The bank continued to withdraw the accommodative policy to ensure a decline in inflation. It needs to be noted that Indian consumer price index inflation unexpectedly rose to 5.1 per cent in June, which marked the recent resurgence in inflation. This was despite the fact that fuel costs fell on weaker oil prices and services inflation eased. However, RBI expects inflation to ease by October-December 2024 quarter and predicts a 4-4.5 per cent range by the end of the current financial year.
Now, with GDP growth lower than RBI’s estimates, economists are expecting the central bank to take accommodative action by December end and rates to be cut by at least 25 basis points. In fact, the central bank has indicated the same. The RBI’s governor has said that this is critical for the last mile of inflation and anchoring inflation expectations. According to him, the food inflation may soften due to good monsoons, steady improvement in Kharif sowing (crops sown during July to September), rising reservoir levels and a likely favourable Rabi (November-January) sowing season output. Economists anticipate that easing retail inflation may lead RBI to cut the policy rate, which would boost household consumption and support private investments. For the current FY24-25, India is pegged to have an annual GDP growth of seven per cent when compared with 8.2 per cent witnessed in 2023-24 (see Table 2).
| Table 2: annual GDP growth in India, FY14-15 – FY24-25F | |
| Financial year | YoY growth (%) |
| 2014-15 | 7.4 |
| 2015-16 | 8 |
| 2016-17 | 8.3 |
| 2017-18 | 7 |
| 2018-19 | 6.2 |
| 2019-20 | 4.2 |
| 2020-21 | -6.6 |
| 2021-22 | 9.1 |
| 2022-23 | 7.2 |
| 2023-24 | 8.2 |
| 2024-25F | 7 |
| Source: Office of the Economic Adviser, Government of India | |
Though India continues to be the fastest-growing economy, it faces challenges in job creation and more inclusive economic growth. The government has stepped up spending with a US$576bn annual budget which includes affordable housing and rural jobs to stimulate economic activities.
Budget infrastructure spending
In its third term of office, the BJP government has kept the capital expenditure for infrastructure intact in the 2024 Budget. Capital expenditure has increased by nearly 17 per cent to INR111.1trn (US$1.33bn) with moderate hikes for railways and road infrastructure while noticeable push for housing. The effective capex for FY24-25 is INR1trn, which includes nearly INR3.9trn of grants to states for infrastructure creation.
The road, transport and highways sector has received the highest capital allocation of INR2.72trn when compared with last year’s INR2.64trn while railways’ allocation increased to INR2.52trn from INR2.4trn over the same period (see Table 3). There was also increased funding for the housing sector with budgetary allocation of INR286.3bn compared with INR265.3bn in the year-ago period. The defence sector received an allocation of INR1.72trn, up by INR150bn when compared with the previous year.
| Table 3: major infrastructure allocations | |
| Sector | Allocation (INR) |
| Road, transport and highways | 2.72trn |
| Railways | 2.52trn |
| Defence | 1.72trn |
| Housing | 286.3bn |
| Ports, shipping and waterways | 10.77bn |
| Source: India’s Union Budget 2024 | |
The budgetary announcements have put a renewed focus on the real estate and infrastructure sectors. Key areas include industrial parks, housing for urban poor and redevelopment of cities. Under the PM Awas Yojana (Housing Scheme), the government targets 30m affordable houses in the urban regions. The resultant impact of these allocations will have a multiplier impact and significantly boost the housing sector, and therefore, the cement industry.
Cement demand in the 1H24
Ever since the last peak construction phase began in November, demand for cement (as shown by proxy of production) has been subdued. Barring March, there was no double-digit growth in the months since. While 2023 closed with an overall growth of 7.5 per cent compared with 10.2 per cent in the previous year, the cement industry witnessed one of the worst phases in the 1H24 (see Figure 1). The latest core industries’ data released by the government indicate that the cement sector grew merely 3.8 per cent during the January-June 2024 period – this contrasts with historical growth reported for this period. A close look at the monthly statistics show that two months – April and May – saw a contraction in demand while June could see a meagre growth of 1.9 per cent. Interestingly, these three months usually show robust cement demand (see also Table 4).
| Table 4: quarterly cement production in India, April-June 2023 – April-June 2024 | |
| Quarter | Production (Mt) |
| April-June 2023 | 110.58 |
| July-September 2023 | 98.25 |
| October-December 2023 | 101.23 |
| January-March 2024 | 115.79 |
| April-June 2024 | 110.87 |
| Source: Office of the Economic Adviser, Government of India | |
In the long election April-June phase when a code of conduct was in place, several of the government-sponsored projects were temporarily halted. Extreme heat wave conditions discouraged construction while water reservoirs showed a deep decline in water levels, or in some cases, dried up, leading to scarcity of water. A hit on overall construction – be it government projects, real estate projects or individual house buildings – impacted cement demand and sales volumes remained under pressure. Total cement production reached 226.7Mt, significantly less than the historical range of 236-240Mt.
Cement companies plan further expansion
Indian cement producers are slated to undertake a three-year INR1.25trn capital expenditure by the end of FY26-27 (see Table 5). This represents nearly 1.8 times the capital outlay of the past three financial years. The surge in capital outlay over the next three years will primarily cater to the growing demand as well as to cement producer aspirations to improve their pan-India presence. A total of 130Mta of cement capacity is likely to be added over this period, taking the overall installed capacity to over 700Mta. This is the biggest expansion of the industry since the 2007-12 period when nearly 120Mta of capacity at a cost of about INR600bn was added.
| Table 5: capital expenditure by Indian cement producers, FY24-25 – FY26-27 | |
| Financial year | Capital expenditure (INRbn) |
| 2024-25 | 420 |
| 2025-26 | 410 |
| 2026-27 | 420 |
| Source: companies and analysts’ reports | |
It needs to be noted that about 20 Indian cement makers capture 80 per cent of the market share in the country. Players such as UltraTech, ACC, Ambuja Cement, Shree Cement, Dalmia and India Cements are among the few large cement makers in the country that dominate the space.Given the healthy demand outlook and manufacturers’ quest to acquire more market share, the top cement makers are gearing up to add new capacities. Strong balance sheets with financial leverage sustaining below 1x on the back of profitability will enable them to do so without impacting their credit profiles. The strength of the cement makers’ balance sheets can be gauged from the fact that over 80 per cent of the projected capital outlay is likely to be funded through operating cash flows, resulting in minimal requirement of additional debt. In the current financial year, investment would be to the tune of INR420bn.
Cement prices under pressure
With subdued demand in the last three quarters, cement prices came under pressure. The average all-India cement price slipped from INR389/50kg bag in the April-June 2023 quarter to INR373/50kg bag in the April-June 2024 quarter (see Figure 2). While cement producers attempted to raise prices in the January-March 2024 quarter, they were unable to sustain the higher price level. And as the elections began, prices slipped further on the back of subdued construction activities across the country. Thanks to the lower input costs, cement makers could digest low pricing without much impact on their balance sheets.
India is currently experiencing a delayed monsoon season that is expected to continue until the first week of October. Poor geographical rain spread is creating floods and drought-like situations. However, construction activities have started to pick up again and cement producers are expecting the 2HFY24-25 to balance out the low demand scenario.
Cement prices have been cautiously raised in August, taking the average cost to INR378/50kg bag in the July-September quarter to date. Sector analysts forecast that cement consumption will rise post-festive season in November as the peak demand season starts. This will allow cement makers to hike prices by an average of INR10-15/bag to INR388-393. In addition, the budgetary boost to infrastructure and affordable housing will support higher cement consumption in the 2HFY24-25, which will underpin prices.
Outlook for 2025
Given the weak 1H24, the current calendar year is likely to see a moderated cement consumption growth of 7-8 per cent. However, as demand-supply dynamics are expected to change in favour of the cement producers by November this year, robust double-digit growth is forecast for the start of 2025.
The huge budgetary allocations to infrastructure and housing are expected to boost cement demand for the full year. Analysts predict a market expansion of 9-10 per cent in 2025 and estimate cement consumption to be between 485-490Mt.
Furthermore, expected rate cuts in upcoming quarters will add the needed stimulus to the economic growth and boost infrastructure activities, aid individual household building and strengthen corporate balance sheets. This is expected to be one of the factors behind the cement sector’s upcoming expansion plans as cement producers cannot afford to lag behind and not be prepared to meet the upcoming cement demand.
Barring seasonal variations, cement prices are likely to remain strong between INR390-400/bag of cement. Combined with inflation that is likely to be under the RBI’s target and therefore input costs that are unlikely to impact the cement sector, this scenario is expected to boost the profitability of cement companies.
Overall, the outlook for 2025 appears better in terms of economic growth with a positive impact on cement demand. However, there also could be some risk factors, which can potentially derail the expected growth trajectory. Weak monsoons, geopolitical tensions, political disturbances in India’s neighbouring countries and, on top of all, any domestic political instability in the coalition government in New Delhi may impact the future growth prospects.
This article was first published in the November 2024 issue of International Cement Review.
