After six strong quarters, growth in demand for cement, a proxy for construction activity in the economy, is set to see a sharp drop of 500 basis points (bps) to 3-5% in the first quarter of this financial year, against a 9-10% rise in the January-March quarter of 2018-19.
In a research report, credit rating agency Crisil said the sudden downturn is because of a slowdown in construction activity ahead of the general elections, labour shortage and delayed release of funds by the government.
The report, based on a sentiment survey of 250 entities across the construction value chain, also found that a ₹50-60 per bag increase in the price of cement in the January-March quarter weighed on housing demand as well.
The construction sentiment score is based on a sample of about 250 respondents at a pan-India level (cement manufacturers, cement dealers, rebar dealers, real estate developers/brokers) and it measures the outlook on construction growth over the next two rolling quarters on a scale of 1 to 10, where 1 indicates a major decline and 10 indicates a robust rise (on a year-on-year basis). The sentiment score at the pan-India level for the next two quarters fell to 5.5 from the previous quarter’s 6.0.
In a statement, Hetal Gandhi, director, Crisil Research, said: “At 2-4%, cement demand growth would be the slowest in the east (Bihar, Odisha) and the south (Andhra Pradesh, Telangana and Tamil Nadu) during Q1FY20. Northern and central states would provide some offset with demand growing 6-8% on-year driven by construction of roads, metros, and affordable housing. In the west, while Maharashtra will continue to show healthy demand growth with state elections looming, Gujarat will be sluggish."
However, the second half of the financial year will see activity pick up, led by institutional spending, leading to a rise of 6-7.5% in cement demand. Around 25 lakh housing units are under construction as part of the Pradhan Mantri Awas Yojana-Urban as of April 2019, Crisil noted, and the Ministry of Rural Development has set a target of constructing 50 lakh housing units under the Pradhan Mantri Awas Yojana-Gramin this fiscal year. Apart from these, ongoing road, metro, and irrigation projects, especially in Maharashtra, Rajasthan, Madhya Pradesh, and Uttar Pradesh, will spur demand.