With activity at near standstill, cement volumes have declined sharply. Analysts at Centrum Broking indicate an average volume impact of 90 per cent in April. While some respite for construction activities was given by the government during the last 10 days of April, this has so far not helped the cement companies. Cement sales stood at just 15-20 per cent of their normal average in April, according to Binod Modi of Reliance Securities.
Experts say that the cement demand during the first quarter of the financial year is typically led by housing (60-65 per cent), followed by infrastructure segment (20-25 per cent). 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. The government’s move to start construction in the infrastructure segment is yet to yield results. Availability of labour will be the main hurdle, followed by logistic issues and red zones, say analysts. Overall, the pick up in activity is likely to be gradual and clarity will come only over the next 4-6 weeks, say analysts at Centrum Broking.
With a significant part of peak construction season getting impacted, FY21 is bound to see a decline in demand. After about 0.8 per cent decline in demand during FY20, the demand is likely to fall by 10-12 per cent during FY 21, estimates rating agency ICRA. Even analysts at JP Morgan expect 10-12 per cent decline in demand given the loss of a strong seasonal month (April), potential labour shortage issues for construction projects (beyond lockdowns), hit to urban housing and a shift in government focus from social housing to other priority areas in FY21.
The only silver lining is the softening raw material prices such as coal and pet coke as well cement pricing trends. Says Anupama Reddy at Care Ratings, “Despite the plunge in demand, the correction in cement prices would be marginal and limited to around 1-3 per cent across markets, given that the industry exhibits pricing discipline”.
Despite declining demand, soft input costs and steady cement prices should lead to just 200-250 basis points contraction in profitability in FY2021 even adjusting for rupee depreciation, says Reddy.
Among the listed companies, ACC remains a value pick for J P Morgan followed by UltraTech which could be a recovery play. Centrum Broking has upgraded their ratings on ACC, JK Cement and Ambuja Cement while maintain positive stance on UltraTech and Ramco Cement.