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India Ratings and Research (Ind-Ra) in its latest report has said that continued government push to build infrastructure will drive cement demand further this fiscal (FY24) by 8-9 per cent over 9 per cent growth in FY23, which will help the sector see some recovery in profitability. According to the report, which has a neutral outlook for the sector for the year, recovery in profitability despite the inflationary pressure and healthy balance sheets will keep the sector in good stead despite the large capex pipeline.

The report further said softening fuel cost to drive recovery in operating margins even as the industry is likely to increase prices only in low single digit. It expects operating margins to recover to Rs 950-1,000/MT in FY24 on the back of softening power and fuel cost. Downside risks could arise from a rebound in coal and petcoke prices, though. After the strong profitability of over Rs 1,000/MT during FY20-22, operating margin has likely fallen to Rs 750-800/MT in FY23 as input costs soared.

Ind-Ra said the infrastructure push by the government will be key growth driver like in the past three pre-election years when the GDP multiplier averaged 1.5 times compared to the long-period average of 0.9 times. Another key driver will be the agricultural sector and the focus on completing affordable housing projects. But the report added that if the likely adverse impact of the El Nino impacted the monsoon, it could pose a downside risk.

However, it said the large expansion plans will keep capacity utilisation below 70 per cent, up from 65 per cent in FY23. It expects 75 per cent of the announced expansion of around 150 million tonnes is actually likely to come on stream during FY23-25. But since most of the capacity addition is coming in grinding units, clinker utilisation is likely to remain 800-1,000 basis points higher than cement utilisation, indicating a higher effective utilisation rate. The report also sees the industry undergoing more consolidation, especially in the south in the near-to-medium term, given the widening gap between leading and small players amid a tough environment and aggressive medium-term capacity targets of large players.