Cement demand to also drop in FY21

They packed the little they had with them and set off with their families towards their hometowns under the scorching summer sun. These were beleaguered men and women who decided to come to the big cities to earn a living so that they could offer a slightly better life to their loved ones in the villages. Most of them are stuck amidst this ongoing nationwide lockdown and have been abandoned by their employers to fight the COVID-19 outbreak on their own, with a bare minimum of wages in their raggedy pockets. Yes, we are talking about the labourers who help build our houses, offices, complexes and whatever building structure that we see around us and a lot more. Their absence is going to deal a heavy blow to the construction and real estate sectors. Let’s try to analyse how deep this impact can be and what are the other factors that are creating disruption in the industry.

Construction Conundrum

One of India’s biggest job creator industries, the construction sector, is facing an acute shortage of labour while there is record unemployment observed at the national level. As India begins to gradually ease stay-at-home restrictions across the country, the top issue will be the labour shortage and slack demand. Builders are living with the threat that their projects will be shut down for several weeks if a single infection is detected, forcing them to proceed with caution.

Ajay Kedia, Director, Kedia Commodity Comtrade Pvt Ltd, tells Steel360, “Almost half of India’s workforce is returning to their villages after some restrictions have been lifted to ease the national lockdown. The labourers have chosen to return home because of the hunger and uncertainty they are facing in the big cities. While the skilled labour segment like carpenters, welders, fitters, plumbers, electricians and riggers may demand wages higher by 20-25%, general unskilled and semi-skilled labour could demand a wage increase of 10-15%.”

He adds that the construction sector hasn’t been doing well since 2016 after the sudden ban on old currency notes had been imposed. The GST that followed later and the crisis in the shadow banking sector that funds these developers only escalated the problems for the construction industry. Because of the lockdown that will complete 68 days (from March 25, 2020 till to May 31, 2020), the cash flow has dried up and contractors cannot pay the labourers.

Kedia observes: “I don’t see any substantial change in this sector in 2020 unless the government sees the market requirement whereby the Reserve Bank of India should undertake aggressive rate cuts and prioritise clearance of the pending projects (under implementation stage); and create a one-time fund to expedite the completion of projects nearing completion (under development stage), which could act as a quick means of reviving the economy.”

He further says: “Construction-related GVA and employment are expected to reduce between 15-34% and 11-25% respectively when compared to the pre-crisis projections for FY21.”

Meanwhile, cement manufacturers have resumed partial operations at their facilities and in grinding units which remained shut following the COVID-19-induced lockdown. Several companies adopted a series of precautionary and safety measures at their facilities, including compliance with standard operating procedures and other measures as advised by government authorities.

The overall size of the construction industry in India is pegged at around the INR 10.5 lakh crore and it contributes around 7.9 -8% of the overall gross value addition for the country.

Rajeshwar Burla, Vice-President,
ICRA Ratings,

Construction is the second-largest employment generating sector in the country. It, along with real estate, are the major employment generators currently for the working population in India, Rajeshwar Burla, Vice-President, ICRA Ratings, said.

In financial year 2018-2019 (FY19), the construction sector grew at around 6.1% which slowed down to 2.9% in the first nine months (April to December, 2019) of FY20. This happened due to a variety of reasons, including muted spending by the private sector. Private sector capital has been at a very low level. Awarding activity also slowed for some of the public sector enterprises due to which the overall growth had been muted at 2.9%.

Impact parameters:

This year, because of COVID-19, the impact will be felt along three major parameters by the construction sector.

First, in terms of project execution, the sector will get impacted because of two aspects: labour and raw material availability. Raw material unavailability was an issue for a brief period, but labour availability is going to affect the sector for a slightly longer period because of the reverse migration that is currently taking place. A combination of these two factors is likely to affect the construction players in terms of execution, thereby resulting in lower billings for the current year. This year, the overall billings for the construction players is likely to reduce anywhere in the range of 15%-20%.

Secondly, since the revenue is low, there will be an associated profitability impact because of under-absorption of fixed costs. The impact on operating profit margins can be anywhere between 150-200 basis points.

The third impact is in terms of liquidity. Amid the COVID-19 lockdown, some of the clients of construction companies will also be facing considerable funding challenges. As a result, the payments to the construction contractors could get delayed. Consequently, the receivable cycle gets elongated and this will have an impact in terms of liquidity for construction contractors.

Key challenges:

For the industry, the major challenges can be two-fold. One is labour availability. At present, post the reverse migration, some of this workforce may want to stay back in their native places for some more time.

Meanwhile, the local state governments have also announced some relief packages for migrant labourers, including social security schemes. Because of this fund transfer that is happening, some of the workers may want to stay back at home for an extended period. This could result in scarcity in labour availability for some construction players who do not have labour camps at project sites and are dependent on sub-contractors.

However, the proportion of the reverse migration as a percentage of the total labour workforce is not substantial. The total labour workforce will be around 3.5 crore of which the reverse migration figure is just a few tens of thousands.

The second issue is the funding challenge. If the bill clearances get delayed, the construction companies will suffer working capital blockage which, in turn, will impact incremental execution.

The state governments are now looking at a revenue deficit this year because of lower tax collections. If the tax collections decrease, spending on infrastructure will also get constrained because the resources available with the state governments are going down. Once that happens, the overall project awarding activity will be muted this year, especially from state governments.

If there are funding challenges, the execution tempo will also get impacted eventually. Execution is likely to get impacted along two dimensions. One is again labour availability and the second is funding challenges that are likely to be faced by clients. The combination of these two is likely to manifest in terms of lower billings and its impact will be seen in FY21.

Rebound yes, but when?:

Considering the current situation, maybe, things should come back to normal after the monsoon or in the second half of FY21, say analysts. Cement and steel, to a significant extent, will also cater to the construction players in infrastructure development. If we are saying that the end-user, which is construction, is likely to witness 15%-20% decline in billings, that means, to an extent, the consumption of steel and cement will also go down, analysts tell Steel360.

The problem is not with the lack of order book. There is an adequate order book position for construction companies. Currently, there is a good pipeline of orders to be executed for majority of the construction contractors. The problem is how do they execute these with labour and funding constraints? That is the important point to be noted here. Many project sites are working at 40-45% efficiency at best. The impact is much more severe in metropolitan cities because of strict restrictions. Only the projects which are remotely located have started construction activity currently.

Worst phase?:

Is construction passing through its worst phase? It may be true, but the same can be said of many other sectors too, analysts say. Lockdown and the stoppage of work have affected all non-essential manufacturing facilities as they had to shut down. However, pre-COVID-19 growth of 2.9% (in the first nine months FY20) was perhaps the lowest for the preceding five-year period (from FY15 to FY20), and this occurred when everything was working fine.

Real Estate Loses Ground

Kedia says, “The global economic slowdown, coupled with the coronavirus pandemic, are likely to negatively impact residential real estate demand in the country this year. The current national lockdown has brought the industry to a standstill and the recovery curve will depend on the fiscal stimulus rolled out by the government and how it will be executed.”

He adds that the ongoing COVID-19 outbreak and its impact on the economy have pushed sentiment in real estate to its all-time lowest level in the quarter ended March. Both residential and commercial real estate sectors are expected to be hit in terms of launches, sales and prices.

To understand the severity of COVID-19 on real estate, Steel360 approached Anand Singhania, Managing Director, Avinash Group, who informs: “The spread of coronavirus has affected many businesses, including ours. Amid imposition of Section 144, the customer who is interested in purchasing property is not able to visit the project site. All transitions and construction activities are in a standstill mode. Once the curfew gets lifted, then only can we hope things to go back to normal again.”

He adds: “Although the government is bringing some relaxations in the lockdown, we are opening our offices on alternate days, but the customers are still not comfortable about visiting sites and investing in real estate at present. Unless there is a free-movement environment and people start returning to their old routine, the real estate sector will not pick up pace.”

He adds: “At our project sites, as of now, we are not facing any raw material-related issue even though prices are on the higher side (both steel and cement) but the main problem is the availability of labour.”

At present, the reverse migration of labour hands is a matter of concern for most real-estate players.

Another worrisome factor is that the monsoon season will begin in India in the next 15-20 days and all construction activities will come to a halt during the rains. Thus, return of the labour hands seems very difficult as of now.

However, Singhania, believes that, at present, India’s coronavirus mortality rate is low and things are being well managed along with the availability of medical facilities. “There is no panic situation as of now and if it continues like this in the coming months, then the post-monsoon market season will see improvements,” he indicates.

Anuj Puri, Chairman, Anarock Property Consultants, says, “Besides the demand-supply decline in 2020, significant new trends will emerge across segments of Indian real estate. COVID-19 has derailed the office segment’s growth trajectory of the last three years. New business models will be tried, making players more reliant on technology for ensuring business continuity. Besides revisiting office requirements, corporates will keep employee health and hygiene of assets as the topmost priority.”

“In Indian retail, the revenue-sharing model will become even more dominant. Retailers will prefer to partner with mall owners to mitigate risks arising from declining footfalls amid such unprecedented crises,” he adds.

House Divided

Investing in real estate or buying a new property is usually one of the biggest investment decisions in ones’ life and people like to carry out this activity with an absolutely free and relaxed mind but these are disturbing times and not conducive to such serious decision-making.

Singhania observes, “Amid the COVID-19 pandemic, I think, people have understood the importance of home and that investing in one’s own house is one of the most useful and safest investments as it provides security to one’s family. Also, during the lockdown period, people have stayed home, spend time with their families and some of them have felt the need for a bigger house. Yet, many others felt they need their own independent living quarters. All these feelings will help in the recovery of the real estate sector,” he observes.

However, current estimates reveal a substantial drop in demand and supply across various real estate segments in 2020. Housing sales could witness a 25-35% yearly drop in 2020 against the preceding year, according to a report by Anarock Property Consultants. Residential sales in 2019 stood at around 2.61 lakh units across the top seven cities and may now fall between 1.70-1.96 lakh units, the report says.

Likewise, new launches may also witness a 25-30% decline during the same period – from 2.37 lakh units in 2019 to anywhere between 1.66 lakh -1.78 lakh units.

Unsold inventory in 2020 will largely remain stable, with a single-digit annual decline of around 1-3%. The nationwide lockdown has completely halted construction activity – project delays could run into several months for well-funded projects, and a couple of years for others, says the report. Nearly 4.66 lakh units across the top seven cities earlier slated for completion in 2020 now face a high risk of delays, as per the report.­

The affordable housing segment, which gained significant traction over the last few years, may also take a hit from COVID-19. The outbreak will significantly affect the affordable housing target audience. With limited income and unemployment fears, buyers of affordable housing may defer purchase decisions, leading to an estimated 1-2% rise in unsold stocks within this segment in 2020.­

Cracks In Cement Demand

“COVID-19’s impact on the cement industry started in March. In December 2019, the cement industry’s production grew by 5.5% on a year-on-year (y-o-y) basis. In January 2020, it grew by 5.1% y-o-y and in February 2020, by 7.8% y-o-y. This was the scene in terms of cement production before March 2020,” Anupama Reddy, Assistant Vice-President, ICRA Ratings, informs.

She adds: “Cement demand showed some improvement between November 2019 to February 2020. However, the adverse impact of COVID-19 has been seen in March 2020. When the lockdown was announced, most of the cement companies had to shut down operations because the demand offtake effectively ceased with construction activity coming to a halt.”

Subsequently, a nationwide lockdown was implemented in March, and cement production was reported at around 24.9 million tonnes (MnT) in March 2020, which is 24.7% lower than in March 2019.

Cement demand:

Reddy explains that the major demand drivers for the cement industry are housing and infrastructure.“We expect cement demand to decline by around 10-12% y-o-y in FY21,” she says.

She details that, usually, housing accounts for 60-65% of cement demand followed by the infrastructure segment, at around 20-25%. Typically, the demand in the first quarter of a financial year is led by rural housing post-harvest season. The loss in household income due to the COVID-19 pandemic is likely to result in low housing demand.

Post-the-lockdown, the pick-up in construction activity is likely to be gradual owing to limited labour availability and lower-than-anticipated spending by the government on infrastructure due to fiscal constraints.

The first quarter usually shows healthy demand for the cement industry, however, which cannot be said as of now. During monsoon, there is a slowdown in construction activities resulting in lower cement demand. Now, analysts expect demand recovery in the cement industry from the second half (H2) of FY21 post-monsoon.

Capacity utilisation:

Reddy highlights that in FY19, the cement industry’s capacity utilisation stood at 71% against a decline to 68% in FY20. This is due to lower cement production.

In FY19, cement production was recorded at 337.3 MnT against 334.5 MnT in FY20. So, it can be said that cement production overall largely remained flat. But, on the capacity front, close to 18-20 MnT of capacity addition happened during this period.

Going forward with the expected decline in demand by 10-12%, this capacity utilisation is likely to slip to 58-60% in FY21. This would have an adverse impact on the return on capital employed (ROCE) of cement companies.

Profit margins:

Reddy points out that despite the plunge in demand, the correction in cement prices would be marginal and limited to around 1%-3% across markets, given that the industry exhibits pricing discipline. Amid the demand pressures, the cement players would still benefit to an extent from the benign input cost – lower pet coke and coal prices given the subdued crude prices.

However, this impact would be negated to a certain extent given the rupee depreciation. Overall, ICRA expects the profitability to contract by 200-250 basis points in FY21.

FM’s Booster Shots for Housing & Realty

  • Finance Minister Nirmala Sitharaman recently said that the urban development ministry will issue advisories for regulators to announce that COVID-19 can be used to invoke the Force Majeure clause on contracts signed.
  •      All registrations made after March 25, 2020, and contracts expiring after March 25, 2020, can be extended by six months without specific applications for it.
  •      The government has extended the timeline for project completions and registration by six months, providing a major relief to real estate developers.
  •      The announcement of an INR 30,000 crore special liquidity scheme for NBFCs/HFCs and MFIs will ease liquidity woes of stressed players.
  •      For the middle-income group of INR 6 lakh to INR 18 lakh, the government has extended the credit-linked subsidy scheme up to March 2021. This will give INR 70,000-crore boost to the housing sector.