Steel, cement companies could get margin boost as demand from key sectors picks up

Economy


MUMBAI: Steel and cement, two capital-intensive sectors that are crucial for building hard infrastructure, are witnessing better sales since October. That could boost margins and growth outlook for the companies in these sectors, which are benefiting from a quicker-than-expected pickup in construction, rural consumption and a visible sales revival in the automotive industry.

Analysts expect a 10-20% year-on-year rise in demand in the second half (H2) of FY21, with many pockets of the economy opened up after months of lockdowns.

“Almost all of the consuming sectors like auto, pipeline projects, ship-building, vehicles and construction have picked up for us since October. We feel that the demand will continue,” said Jindal Steel and Power (JSPL) managing director VR Sharma.

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For JSPL, demand has reached pre-Covid levels. The company expects that in Q3 sales will be at least 7-8% higher than the normal consumption levels, and in Q4 it should be at least 10% higher than the previous year.

“We can say that Q3 will be one of the best quarters for steel companies in terms of operating profits per tonne in the past three years,” said Jayanta Roy, senior vice president at credit rating company Icra.

Pent-up demand in sectors such as automobiles, consumer durables or residential housing may have quickened the pace of recovery in Q3. Traction in large infrastructure and construction projects can further add to the strength of demand, added Roy.

As there was low spending in the economy during April-June, pent-up demand has also played a role for a quick recovery in steel and cement sectors.

“Initially, there was some pent-up demand from automotive and the festive demand that came in. However, new demand which was not there before, as in infra, has come back. It looks like a structural shift now,” said ArcelorMittal Nippon Steel’s chief marketing officer Ranjan Dhar.

The situation isn’t vastly different in the domestic cement industry, the world’s second biggest after China.

“Earlier, we all thought that this could be pent-up demand. However, seeing the continuing trend in rural and a pick-up in segments like individual home building, it is definitely real demand that we are witnessing,” said Mahendra Singhi, CEO, Dalmia Bharat.

Rural demand is still strong; however, even metro cities are showing momentum, especially with fresh housing. Demand should be better in December, Singhi added.

“We expect sentiment to remain strong heading into the busy construction season as utilisation will pick up further from here. We estimate industry Ebitda to grow at 10% CAGR over FY20-FY23 (revised upwards by 1-5%),” said Neeraj Akhoury, CEO, Ambuja Cements.

Analysts estimate the demand and margins of companies to improve substantially in the December quarter of FY21, although a favourable base effect could magnify the growth performance.

“For steel, Q1 saw a negative 55% of demand. Q2 was significantly better but there was a contraction of around 6-8%. October was near pre-pandemic levels to negative 2%. And for November we estimate that it must be a pretty good growth amount, could be a positive 10% or more,” said Manish Gupta, senior director at Crisil Ratings.

For the cement sector, volumes and margins have played a balancing role. Price increases will help cushion the volumes dip for FY21.

“Even with a 30% demand decline in Q1, the cement sector may see only around 4-5% decline overall FY21 – primarily because of the recoveries since October,” said Crisil’s Gupta.



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