Green shoots in cement sector may wilt on construction ban in several states2 min read . Updated: 05 Sep 2018, 01:57 PM IST
While sector analysts are hopeful that these state governments will come up with a solution at the earliest, a prolonged ban would hurt cement volumes and pricing
The Supreme Court of India, in an interim order, has banned all construction activity in the states of Maharashtra, Madhya Pradesh, Uttarakhand and the Union Territory of Chandigarh. The order was a result of the respective governments failing to draft policies on solid waste management, in spite of the apex court’s direction. Clearly, this is a blow to real estate companies operating in these regions. As collateral damage, the cement industry, which is desperate for a demand revival, is bound to feel the heat.
Among these states, Maharashtra is key for real estate as well as infrastructure spends. Also, the state is estimated to account for 10% of the country’s overall cement demand.
For a long time now, cement demand has largely been aided by government spending on infrastructure. On the other hand, one is yet to see any major improvement in cement demand from trade sales (retail).
Although data from the department of industrial policy and promotion shows that the cement sector’s volumes increased by 13% on a year-on-year basis in June to 28.6 million tonnes, it should be noted that the surge is on a low base.
The interim ban will be in place till 9 October when the apex court will hear the matter again.
While sector analysts are hopeful that these state governments will come up with a solution at the earliest, a prolonged ban would hurt cement volumes and pricing.
As the accompanying chart shows, cement companies having exposure mainly to Maharashtra such as Century Textiles and Industries Ltd, Ambuja Cements Ltd, ACC Ltd and UltraTech Cement Ltd would be impacted.
Among larger cement makers, Shree Cement Ltd and Dalmia Bharat Ltd would be least affected since the banned regions contribute negligible volumes for them.
Meanwhile, cement dealers’ channel checks by various broking houses showed that prices in Madhya Pradesh declined by ₹ 5/bag in August. One cement bag weighs 50kg. In Maharashtra, the prices fell by ₹ 10-35/bag in Pune, Nagpur and Mumbai, and the fall was the sharpest in Mumbai.
Lack of adequate demand has kept a lid on cement prices and the construction ban would restrict any improvement in prices at least for the remainder of the September quarter.
Cement pricing is particularly important especially because costs are rising. Although the prices of imported and domestic petroleum coke—a key input material for cement makers—have eased, it is too early to say if the trend will sustain.
Since the second quarter of the fiscal year is seasonally weak for cement makers, volume growth expectations are already muted. That said, with this construction ban, investors in cement stocks should brace themselves for yet another quarter of dismal earnings performance.