Home / Companies / News /  For cement sector, recovery from demonetisation could be round the corner

Mumbai: Cement makers have survived the demonetisation shock quicker than expected with the southern markets affected the least, several manufacturers and analysts said. A full recovery may not be far either.

Management commentary and results for the December-ended quarter show impact of demonetisation was not as severe as anticipated.

H.M. Bangur, managing director of Shree Cement Ltd, expects a demand revival soon. “Sales have been definitely down and demand is lower by 10-11% in the markets we are present in, which is both east and north India. Growth should come back in two-three months’ time. In fact, it should be very positive in the next three months," Bangur said, adding the sector typically grows 5-6% every year. Shree Cement reported a rise in both standalone net profit and sales for the third quarter ended 31 December.

ACC Ltd on Friday said that the slowdown witnessed after demonetisation has eased and that increased government allocation in Union Budget for infrastructure development, housing, roads, and railways is expected to boost demand for cement and concrete industry during 2017.

UltraTech Cement Ltd’s December-quarter results showed its volumes were not as severely affected as feared—domestic sales volumes declined 2% at 11.01 million tonnes (mt), less than estimated by analysts.

Another cement maker JK Lakshmi Cement Ltd on Friday said that despite the dent in demand due to demonetisation, its production and sales grew 6% and 4% respectively in the quarter ended 31 December.

Prime Minister Narendra Modi announced the withdrawal of Rs1,000 and Rs500 currency notes on 8 November as part of a crackdown on black money, counterfeiting and terror finance, a move that triggered an acute cash shortage and a consequent decline in economic activity.

On 1 February, the government announced increased budgetary allocation for sectors including highways, railways, and other infrastructure, which are the biggest consumers of cement.

“The immediate impact of demonetisation was a reduction in sales as well as prices in most of the markets... The housing sector had immediate impact, but the dealers were fast in adopting non-cash methods of payment. However, it may still take a few more months for the things to fully stabilize," said Shailendra Chouksey, whole-time director, JK Lakshmi Cement.

Chouksey said activity in the infrastructure sector has slowed due to migration of labourers and labour contractors, but the recovery in this segment may be faster than other sectors.

According to HDFC Securities analyst Ankur Kulshrestha, the sector was initially expected to take a debilitating hit but companies seem to have handled it well. “We expect companies in our coverage universe to register only 2.5% de-growth (decline) in volumes, while realisations are expected to remain flat YoY," Kulshrestha wrote in a 10 January note to clients.

According to brokerage firm PhillipCapital, cement manufacturers in the southern states are expected to report high double-digit growth in third quarter ended December. However, companies selling in other markets are likely to report weak results, it said.

“As per our dealers check, North and Central regions are most impacted due to demonetisation while South region is least impacted (because of fewer cash transactions in South vs. North/Central)," Karvy Stock Broking said in a 13 January report.

The Indian cement industry is estimated to have a capacity of about 420 mt. ACC, Ambuja Cement Ltd, UltraTech and Dalmia Cement Ltd command about 40% of this market. The majority of output—about 60%—goes into housing, followed by infrastructure and commercial sectors.

Last year, cement manufacturers benefitted from low fuel and commodity costs. However, prices of coal and petcoke have risen sharply in the past six months, leading to higher fuel costs. In this context, lack of pricing power with the companies could have hurt performance.

Contrary to expectations of a significant decline, cement prices pan-India are down only 1%, IDBI Capital said in a recent report.

According to Edelweiss Capital’s survey of the domestic cement sector, companies were positively surprised to see a lower-than-expected contraction in demand. “Inventory destocking resulted in price dip of 4-5% MoM (month-on-month) in December, resulting in negative price volume trade off, at least in Q3; and lower-than-anticipated demand contraction fuels reasonable probability that cement manufacturers will be able to pass on the fuel price hike in the next 30-45 days," Edelweiss said in a 5 January report.

In the first seven months of FY17, cement demand grew a modest at 4.8% and after the note ban, it could have been affected negatively because of the disruption to the real estate sector, according to a report published in December by rating agency ICRA.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Recommended For You
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout