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Will the rally in cement stocks sustain given challenges to demand growth?

If cement prices sustain till end-June it would offset the impact on June quarter’s revenue, due to lockdown-led drop in sales volumes. Photo: BloombergPremium
If cement prices sustain till end-June it would offset the impact on June quarter’s revenue, due to lockdown-led drop in sales volumes. Photo: Bloomberg

  • In the Q4 results analysts’ call, most cement firms indicated a quick ramp up in utilisation levels, since the lockdown was eased
  • The commentary by most cement firms on outlook for fiscal 2021, was cautious

Cement manufacturer Birla Corporation Ltd’s shares vaulted 12% on Tuesday. The stock followed the trend of peers whose shares rose on the back of decent results in the March quarter. ACC Ltd, Ambuja Cements Ltd, UltraTech Cement Ltd and Shree Cement Ltd are up 7-13% since the lockdown was partially eased on 21st April.

What is driving this optimism amid macroeconomic gloom?

To begin with, investors are positively surprised by the sustained increase in cement prices in May. A report by Emkay Global Financial Services Ltd pointed out, “Our channel checks indicate that cement prices have been increased by 20-30/bag in the North, Central and West markets; 20-50/bag in the East markets……and 40-90/bag in the South region." (a bag of cement weighs 50 kilograms)

Note that cement prices, which were subdued for many quarters had improved since October.

The moot question is whether cement prices will continue to rise?

Analysts believe that increase in cement offtake and prices after the lockdown was eased is mainly due to pent-up demand. Some dealers feel that the need to complete stalled projects, be it housing or infrastructure, led to spurt in demand. Also, there was a hurry to resume stalled construction, especially in the central and western regions, where the onset of monsoon will again hamper execution.

Binod Modi, analyst at Reliance Securities Ltd stated that on the back of demand surge, cement manufacturers hiked prices to meet higher fixed costs and supply chain challenges. “Such abrupt price increases are bound to normalise in the coming weeks, as utilisation levels improve," he adds.

In the Q4 results analysts’ call, most cement firms indicated a quick ramp up in utilisation levels, since the lockdown was eased. Capacity utilisation was at 65-70% at UltraTech’s plants in mid-May, while Birla Corporation said that it had touched 80%. That said, the commentary by most cement firms on outlook for fiscal 2021, was cautious.

Indeed, if cement prices sustain till end-June it would offset the impact on June quarter’s revenue, due to lockdown-led drop in sales volumes. That apart, input costs are bound to remain benign for some time, which will support profitability.

Even so, analysts have pencilled a double-digit drop in cement demand for FY21.

“Migration of workers could prove to be a roadblock in ramping up construction work," adds the Emkay report. Besides, the covid-19 pandemic impact on infrastructure spends by the government and on housing sector, will weigh on cement demand for a few quarters ahead. If these challenges soften cement prices and demand in the months ahead, it would weigh on cement stocks too

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