Cement sector: If demand fails to pick up, stocks may come under pressure

Care Ratings estimates a recovery timeline of 3 - 12 months for the sector and expects a negative bias in ratings
Stocks of major cement manufacturers, such as Shree Cement, UltraTech Cement, ACC, and Ambuja Cements have rebounded about 42 per cent since their March-April lows, as easing of the lockdown has helped demand recover and kept realisations firm. This, coupled with benign input prices, has augured well for profitability. However, sentiment could weaken again, if volumes fail to pick up.

After sales clocked in at just 15-20 per cent of normal in April because of the lockdown, they improved and were better-than-expected in May propped up by pent-up demand and decent traction in rural markets. In fact, construction in rural areas remains uninterrupted because of good labour availability.
Going ahead, too, traction in rural demand should continue on the back of the projected good harvest, normal monsoon, labour availability, and government’s welfare schemes. Overall, rural volumes are estimated to be 60-80 per cent of normal.

Among regions, eastern India is recovering faster than other regions because it was impacted lesser, say analysts at HDFC Securities. This is positive for realisations in that region, which has seen significant capacity expansion in the recent past because of improved limestone availability. Demand growth in the east and a lower fall in the northern and central regions have helped in limiting the impact of the sharp fall seen in the southern and western regions.

 

 
On the pricing front, Prabhudas Lilladher’s recent channel checks in June suggest that all-India average prices are up 10 per cent (by Rs 30 per 50 kg bag) over May, helped by pricing discipline and improving demand.

However, there is still some uncertainty about the way forward. For one, while petcoke and coal prices have been lower, aiding margins, fuel (diesel) prices are rising and could lead to higher logistics costs. Moreover, with crude oil prices inching up, other fuels might follow suit. Second, demand in urban areas is at 30-50 per cent of normal. So, overall demand is still well below usual levels.
Analysts at Reliance Securities say supply side problems have led to a sharp increase in prices, but there is uncertainty about how demand will pan out in the coming weeks because of the exodus of migrant labourers and funding constraints for projects. The onset of the monsoon, too, should slow activities. The recent demand might have been spurred by the rush to complete some construction works before the monsoon.

In a recent note, HDFC Securities, which is positive on cement stocks, said, “Sales contraction is expected to continue in June, too, driven by continued sharp decline in non-trade segment. Demand is coming mainly from ongoing projects. In our view, cement prices have peaked in April/May and should cool off in subsequent months as demand picks up.” However, concerns remain in the absence of significant new projects, persistence of labour issues, constraints on government finances, and muted demand from the real estate sector.

CARE Ratings estimates a recovery timeline of 3-12 months for the sector and expects a negative bias in ratings. But, if indeed demand lags expectations, stock prices might come under pressure.


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