After a weak April, cement demand to fall by 10-12 per cent in FY21

Housing demand has taken a major hit, especially in urban centres. Though there has been some activity in rural areas, this is not enough to boost overall demand.
With activity at a near standstill, cement volumes have declined sharply. Analysts at Centrum Broking indicate an average volume impact of 90 per cent in April. Though some respite for construction activities was given by the government in the last 10 days of April, this has not helped cement companies, yet. Cement sales stood at just 15-20 per cent of their normal average in April, according to Binod Modi of Reliance Securities.
Experts indicate cement demand during the June quarter is usually led by the housing segment (60-65 per cent), followed by the infrastructure segment (20-25 per cent). Housing demand has taken a major hit, especially in urban centres. Though there have been some activities in rural areas, these are inadequate to boost the overall demand. The government’s move to start construction in the infrastructure segment is still to yield results. Availability of labourers is the main hurdle, followed by logistics issues and red zones, say analysts. Overall, the pick-up in activity is likely to be gradual and clarity is expected the next four-six weeks, say analysts at Centrum Broking.

 

 
With a significant part of the peak construction season getting affected, FY21 is bound to see a decline in demand. After about 0.8 per cent decline during FY20, the demand is likely to fall another 10-12 per cent in FY21, according to rating agency ICRA. Even analysts at JPMorgan expect a 10-12 per cent decline in demand, given the loss of a strong seasonal month (April), a potential shortage of labourers for construction projects (beyond lockdowns), the hit on urban housing, and a shift in government focus from social housing to other priority areas 
in FY21.
The only silver lining is softening of the prices of raw material, such as coal and pet coke, besides cement pricing trends. Anupama Reddy at Icra Ratings says: “Despite the plunge in demand, the correction in cement prices would be marginal and limited to around 1-3 per cent across markets, given the industry exhibits pricing discipline”.

Despite declining demand, soft input costs and steady cement prices should lead to just a 200-250-basis point contraction in the profitability in FY21, even adjusting for the rupee depreciation, says Reddy. 

Among the listed companies, ACC remains a value pick for JPMorgan, followed by UltraTech, which could be a recovery play. Centrum Broking upgraded its ratings for ACC, JK Cement, and Ambuja Cement, while maintained positive stance on UltraTech and Ramco Cement.



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