SHADOWY 2021 FOR BUILDING MATERIALS SECTOR
One of the industry having faced maximum impact of the pandemic, the building materials segment slowly bounced back in 2021. Though the second wave of the pandemic disrupted the momentum, from June onwards, the revival trajectory has been positive. The reforms like low cost housing loans and incentives for affordable housing buyer along with funding support for stalled realty projects and tax sops for housing industry and infrastructure provided an impetus to the construction material industry as well. However, there were certain roadblocks as well. The construction sector in April 2021 welcomed the Indian government decision of easing the restrictions on Covid-19 with decrease in the cases of coronavirus, but the increase in the cost of some building materials by almost 35 percent put burden on the pocket of developers. The steep hike in the material costs was primarily attributed to factors such as continuous lockdown, logistics issues, freight costs, supply chain disruption and also labour shortage. The restrictions on import of materials and equipment from China added to the woes. A hike in the price of industrial gas by Gujarat Gas Ltd has put an additional burden of over Rs 100 crore per month on ceramic units in Morbi, the country's largest cluster. As per Morbi Ceramic Association President Nilesh Jetpariya, the hike may force nearly 30 per cent units operating in Morbi to stop production. Indian Steel Association has expressed concerns on issues pertaining to logistics, issuance of RoDTEP for steel products to encourage exports, the PLI Scheme and the implementation of proposed National Mineral Index that can bolster the steel industry. Rise in input costs for coal, petcoke & diesel has hit the cement manufacturers overall operating margins by 200- 230 basis points as per the ratings agency ICRA. In fact, the projected decline in operational margins is despite a rise in demand from the infrastructure and housing sector. And that led to several cement manufacturers going for a price hike in 2021. Similarly, rising working capital needs and elevated raw material prices have put wood panel companies in a tight spot with cost inflation weighing on their margins. To tackle this, companies have been taking gradual price hikes. In the plumbing segment, the mandatory compliance of the BIS (Bureau of Indian Standard) quality norms announced in 2021 forced many small piping companies to shut shop. Paint companies that showed good volume growth in recent times, too are experiencing inflationary pressure on raw materials, logistical issues and pressure on gross and EBITDA margins. THE RAY OF SUNSHINE The above examples are just a small hint of the tough year that 2021 had been for the allied industry segment. However, it was not without its bright spots. In a latest development, the Ministry of Environment, Forest & Climate Change (MoEF&CC) is considering exempting the mandatory requirement that has come as a major relief for thousands of unorganized sector polyvinyl chloride (PVC) pipe manufacturers. The amendments are awaited along with the timeline for the phase-wise elimination of lead in non-ISI PVC products. Also, the government has identified readymade furniture as one of the 20 sectors to make India a hub for global exports which augurs well for MDF manufacturers. Furthermore, the debottlenecking and faster rollout of various flagship government projects especially within the National Infrastructure Pipeline (NIP) is set to increase the demand for steel structures and will boost the steel products companies. South Indian Cement Manufacturers’ Association (SICMA) President, N Srinivasan too has expressed optimism for the sector on the government announcement of big ticket infra projects and is hopeful that the Finance Minister will present an expansionary budget for 2022-23 with a renewed thrust on investing in capital assets and infrastructure. State-owned Coal India Ltd (CIL) has taken an out-of-the-box initiative to produce sand at a much cheaper price. The initiative will not only help in minimising environmental pollution due to sand siltation, but will be also an option for getting cheaper sand for construction purpose. TECHNOLOGY TO THE FOREFRONT The year 2021 was also the year of technology acceleration across all segments of real estate and construction. Ancillary industries too saw aggressive adoption of technology and shift to automation from manual processes to improve production and cost efficiency and product quality. Environmentally sensitive products, smart functions and hygienic surfaces and applications are leading the product demand from the consumers. The increasing cost of input materials too is driving the companies to switch to alternative materials or production optimization through technical processes. Another key change is the shift to sustainability. Following the COP26 (26th UN Climate Change Conference of the Parties) resolutions this year, the companies are attempting to minimise impact of industrial processes and are using recyclable products along with modern manufacturing techniques. INFRASTRUCTURE & REAL ESTATE IMPACT Evidently, infrastructure and real estate are the two key sectors that drive the growth of the construction materials and building products industries. As rightly said by Kumar Mangalam Birla, Chairman, UltraTech Cement, "The demand is closely linked to the housing and infrastructure sector. The industry will see a volume growth motivated by the government's ‘Housing for All by 2022' mission and large infrastructure projects in the pipeline." The government in its recent announcements has emphasized on the use of steel intensive structures for long span road construction, fly overs, foot overbridges, in flood prone areas and use of pre-fabricated structures in rural areas. The resumption of construction work related to institutional infrastructure projects in 2021 has been the harbinger of recovery for the allied sectors. Seshagiri Rao, Joint Managing Director and Group Chief Financial Officer, JSW Steel had mentioned, “Indian steel consumption in the first six months of this financial year was 49 mt against 36.5 mt in the previous year. Even though the second quarter was subdued, we are already seeing traction in the residential sector side and the government expenditure side.” A recent industry survey has put rise in housing sales across top seven cities to 71 per cent year-on-year in 2021. The festive season especially saw residential real estate sales outperforming in major cities. With developers focusing on completing projects and government too through SWAMIH fund ensuring completion of projects, the building material segment saw rise in demand across all categories. The price hike remained the cause of concern for developers. Ashwin Reddy, Managing Director, Aparna Enterprises Limited stated, “Developments in the housing sector directly impacts the building materials industry and by introducing norms that would enable greater investments and streamlining tax rates, the government would be bringing in a much needed relief for the segment.” A PERIOD OF LEARNINGS Construction and building materials sector is treading the path to recovery and revival is evident. The reducing margins and rising production costs as well as stricter regulatory compliances and restrictions on imports are some of the challenges that need to be dealt with. But the economy seems to be bouncing back. This is especially highlighted by the Asian Development Bank, which states that India will make a strong rebound in the fiscal year 2021-22 with its Gross Domestic Product (GDP) surging by more than eight percent as mobility and business activities resume. This gives a perspective on the industry's potential and the opportunities that can be leveraged by the product companies. Construction material, equipment and building products companies are going all out to maintain resiliency and adopt new ways of work to bring agility and technology to the organizations. The pandemic has taught many traditional industries to be innovative and flexible in working and this learning, is paving the way for the future growth and success of the sector.
Tags : Morbi Ceramic Association President Nilesh Jetpariya low cost housing loans incentives for affordable housing Ministry of Environment Forest & Climate Change (MoEF&CC) South Indian Cement Manufacturers’ Association (SICMA) President N Srinivasan Kumar Mangalam Birla Chairman UltraTech Cement Seshagiri Rao Joint Managing Director and Group Chief Financial Officer JSW Steel Ashwin Reddy Managing Director Aparna Enterprises Limited