Home >Markets >Mark To Market >How a Bengaluru construction ban will  impact the cement sector

Considering that Bengaluru’s water woes are increasing with each passing day, speculation is rife that the city authorities might ban construction activity for five years.

Clearly, housing being a key demand driver for cement producers, such a move, if implemented, won’t bode well, more so, as it comes at a time when the overall demand is subdued.

“Considering that Karnataka consumes 20 million tonnes of cement annually and Bengaluru accounts for nearly 4 million tonnes of that, some impact on demand will be there if this move is implemented," said Binod Modi, an analyst with Reliance Securities Ltd.

So, for now, analysts are hoping that the authorities in Karnataka would work some other way out to deal with the water crisis.

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(Graphic: Vipul Sharma/Mint)

“It would be draconian to put a complete ban on construction. Also, such a decision, even if implemented for a small duration, could set a precedent for other regions facing similar issues," said an analyst with a domestic brokerage house.

“So far, government-led infrastructure demand has been aiding cement demand and it is difficult to say if that would be able to compensate for housing demand if this decision is taken. That said, even if a partial construction ban is implemented in the city, it would come as a severe sentiment dampener for all the cement stocks," he added on condition on anonymity.

Cement demand in the June quarter across India was impacted by slow project execution in the run- up to the general election, which usually results in labour unavailability.

The second quarter of a fiscal year is typically a weak season for the sector, given the dampening effect of the monsoon. This simply means that demand recovery, if any, is likely to happen only in the second half of the fiscal year.

As for cement prices, after the steep hikes in April, they have corrected pretty much across the country in June.

According to a dealer channel check by Kotak Institutional Equities Ltd, cement prices declined by 8/bag on an average in the south to 364/bag. One cement bag weighs 50kg.

The Kotak report further added that prices declined by 8/bag in Andhra Pradesh and Tamil Nadu, and in Karnataka by 10/bag.

According to JM Financial Institutional Securities Ltd, cement prices in Bengaluru fell from 390/bag in May to 380/bag in June.

Clearly, since the price hikes taken from the beginning of April have failed to sustain, it highlights the issue of excess supply in the southern part of the country. In such a scenario, a ban on construction even in one city could take a toll on prices across the region.

Meanwhile, hopes aren’t too high from cement producers in the June quarter in terms of volume and revenue growth. One bright spot, however, could be an improvement in the margins due to softening input costs, but analysts caution about reading too much into it.

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