Cement: sales volume halves in November; south-based firms least hit
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Cement demand, especially in the trade segment, contracted significantly in certain regions of the country given the prevailing liquidity crunch.
Channel checks suggest that dealer counter sales, which are 50-70% cash-based, were hit up to a similar quantum in the first week post- demonetization, pointed out a report by Antique Stock Broking Ltd.
On a month-on-month basis, sales volume in the trade segment slipped 20-50% in November, according to a Reliance Securities Ltd report.
However, volumes in the non-trade segment did not see much of an impact.
Region wise, while cement demand significantly weakened month-on-month across northern, central, eastern and western regions, southern India was least impacted.
According to reports from some brokerage firms, demand declined to a lesser extent of nearly 20% in south India.
“The impact on sales was lower in south India, which is considered a more mature market having higher contribution from the institutional segment and more reliance on formal ways of funding,” added the Antique report.
The biggest demand driver for cement firms has been the housing sector, as it accounts for nearly 60% of total consumption, followed by infrastructure and commercial sectors. Thus, companies with higher dependence on the home-building segment saw larger impact on sales on a year-on-year basis than others.
At company-level sales, entities with relatively higher exposure to individual home builders’ segment such as ACC Ltd, Ambuja Cements Ltd and Lafarge India saw volumes fall 5-15% year-on-year on a weak base.
On the other hand, volumes of those with relatively higher institutional segment sales were flat to 10% up year-on-year, Deutsche Bank said in a report.
Given the demand lull, cement prices corrected across India. “Pricing across most parts of the country has been under pressure with the all India average falling 3% m-o-m (month-on-month). Among regions, the south was most stable with only 1% fall while the west saw the highest fall of 8%,” it added.
Not only cement demand, supply of building construction material like sand, steel and gravel has also taken a beating since a large part of such transactions is done on a cash basis.
In a bid to keep the business running, companies are extending credit periods by 5-10 days across regions. Also, sales are shifting from cash to other modes of payment.
Dealers don’t foresee a major recovery in cement demand or in prices in December.
Negative impact on volume growth post-demonetisation will hit operating leverage, driving costs higher. Also, rising fuel costs may lead to margin compression. Thus, some brokers have begun to cut earnings estimates for cement companies.
Motilal Oswal Securities Ltd said in a report that it has factored in possible volume loss for cement firms under its coverage and accordingly trimmed Ebitda estimates by ~5-15% over FY17-FY19. Ebitda stands for earnings before interest, tax, depreciation and amortization.