CEMENT: Monsoon rains key to pick-up in demand
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Cement firms had a good March quarter. The combined operating profit for the 23 big cement firms grew 15% from a year ago. It had nothing to do with the base effect, too; operating profit grew 7.8% in March 2015.
The impetus for this growth came from the southern markets—mainly from Telangana and Andhra Pradesh, where a new capital is coming up. A healthy pick-up in infrastructure projects—mostly government wards—also led to an increase in cement demand. Thus, south India-based cement firms such as India Cements Ltd and Ramco Cement Ltd gained more. The latter’s operating profit margin soared to an industry high of 31% in the March quarter.
Overall, cement shipments grew nearly 11% from a year ago in the March quarter. The big question now is whether this is a one-off or sustainable?
The consensus seems to be saying fiscal 2017 will tend to be better than the previous year. This would be largely driven by the government’s increased public spending and initiatives such as housing for all, smart cities mission and a dedicated freight corridor.
But that’s not saying much.
Nobody expects the real estate sector to turn around. So, there is unlikely to be any significant demand in housing. Both rural and urban housing demand is likely to remain muted in FY17. The government’s infrastructure push would not be adequate to sustain this demand; private investment also must rise.
Overall, India Ratings Ltd see cement demand growing 4-6% in FY17. Cement firms themselves anticipate a 6-8% rise. All this again depends on a good monsoon after two years of drought.
The margins also may not be sustainable. In the immediate quarter, the input costs may remain under check, but energy and commodity prices have already started to climb.
Secondly, given the overcapacity in the industry, cement firms don’t seem to have much pricing power, too. Yes, there was a strong increase in cement prices in the March quarter; but after that, the hikes have been muted.
All-India average cement prices have improved merely by around 1% month-on-month, said a Reliance Securities note. For prices to rise further, a substantial improvement in demand is needed. After the previous year’s drought, a bountiful monsoon is the key demand driver.