ACC, Ambuja and Shree Cement likely to see volume decline of 4-13%

Cement factory
Cement companies are facing a slowdown in demand, with volumes growing at the slowest pace in six quarters. This comes even as realisations and lower costs have provided some comfort. Demand, which had remained strong in March, has slipped since, in what is usually a good season.

The slack demand led to a roll-back in price hikes taken by manufacturers in May and June. There might not be much respite, given the ongoing monsoon, during which activity slows down. Therefore, the stocks of pan-India players UltraTech and ACC have seen corrections from their highs in May. Even regional players like Ambuja Cement have corrected.  

Having witnessed a strong demand environment during H2FY18 till FY19, domestic cement firms are likely to report subdued sales volume in Q1FY20, on the back of soft demand, factoring in an expected 7-10 per cent de-growth in demand for the industry during the quarter, says Binod Modi of Reliance Securities.

Even analysts at Motilal Oswal Financial Services expect companies that they cover to report 6 per cent year-on-year (YoY) decline in volumes for the June quarter. Demand growth had remained a strong 12 per cent in FY19, but started faltering from the beginning of the June quarter. 

While the fall can primarily be attributed to lower government spending due to the elections, factors such as labour shortage, water shortage in several pockets, and general liquidity issues have also hit demand. North India saw construction activity come to a halt on account of the extreme heat situation in May, while in South India the water crisis was the major reason.  

 Analysts expect weak demand to persist until the end of monsoon. However, all eyes will also be on the progress of monsoon, to drive rural demand and a pick-up in the economy. 

Companies are hopeful of some push to demand in H2, led by the infrastructure segment. With demand softening in Q1, and a seasonally soft Q2 in progress, outlook for the financial year is getting a downward revision. 

ICRA has pegged demand growth of 7 per cent for FY20, compared to 13 per cent per cent in FY19. 

While majority of the cement players are expected to report a decline in volumes, UltraTech is expected to report volume growth on expanded capacities. 

LafargeHolcim Group companies ACC and Ambuja are expected to report 4-6 per cent YoY decline in volumes, according to HDFC Securities, compared to UltraTech’s 6 per cent YoY growth. Shree Cement, though, may see steep decline of 12.7 per cent YoY. However, with capacity expansions in progress, the Street is not too concerned with volume growth. 

Companies, however, may see better realisations and lower input costs driving profitability in the June quarter, thus offsetting the impact of lower volumes. Shree Cement is seen reporting 49.8 per cent jump in per-tonne profitability, being a cost-effective player. Better per-tonne realisations in northern, central and western India may also help. 

UltraTech, being a pan-India player, is expected to report an improvement in per-tonne profitability by 29 per cent YoY. ACC and Ambuja are seen reporting 2.5-40 per cent rise on this parameter, according to estimates by HDFC Securities. 

Among others, Orient Cement is seen reporting 81 per cent YoY jump in per-tonne profitability as Deccan Cement, JK Lakshmi Cement, JK Cement and Ramco Cements could see 33-75 per cent improvement.



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