After robust growth in the second half of the financial year 2018-19, the cement sector is likely to have seen subdued growth in Apr-Jun quarter on account of muted demand, and Lok Sabha election 2019 is to blame for it.
After robust growth in the second half of the financial year 2018-19, the cement sector is likely to have seen subdued growth in Apr-Jun quarter on account of muted demand, and Lok Sabha election 2019 is to blame for it. The slowdown in government spending, labour scarcity, decreased water supply and lack of private capital expenditure are key factors for soft demand, according to analysts. Most of the government projects were put on hold during elections as the funds could not be released due to the code of conduct. In various markets there was a standstill kind of situation due to elections, analysts said.
“The domestic cement companies are likely to report subdued sales volume in 1QFY20 led by soft demand scenario, as the industry’s demand is expected to have witnessed 7-10% de-growth during the quarter. A slowdown in government spending on the backdrop of General Elections, labour unavailability, water scarcity and persistent absence of private capex took a toll on demand. The cement companies under our coverage universe are expected to report an average ~2% YoY de-growth in volume, despite ~6% YoY growth in UltraTech Cement’s sales volume led by new capacities,” Reliance Securities said in a report.
However, despite the muted growth in revenue, healthy realisation recovery across regions and benign cost environment are likely to cushion up the fall in revenue in Apr-Jun. The cement companies are likely to report average EBITDA (earnings before interest, taxes, depreciation and amortisation) and PAT or profit after tax at 34% and 36% year-on-year basis, said Reliance Securities. It also noted while the prices of imported petcoke boradly remained flat (-15% YoY), in the domestic market MRPL and Reliance Petcoke too moderately increased by 3% on a quarterly basis. Further, the diesel prices remained broadly flat too on QoQ basis. But due to lower capacity utilisation, there would be a marginal increase in the operating cost by Rs 40-60 per tonne, Reliance Securities further added.
Despite the increase in cement prices, the muted demand for the building material on account of elections, the Apr-Jun quarter sales will see a muted growth, said marketing head of one of the leading cement companies who didn’t wish to be quoted. Commenting on the current quarter, he said Jul-Sep is already a bad quarter for the building material as construction is not undertaken during monsoon season. The state government contemplating ban on construction of new flats in Bengaluru due to water shortage also doesn’t augur well for the cement industry. However, the government’s thrust on infrastructure, overall FY 20 will be good for the cement industry.
“Despite a slowdown in government projects during the elections and a labour shortage, average cement volume growth was a decent ~13% y/y in FY19 (1% y/y in April’19). The pressure on pricing is likely to continue for a few months considering the contraction in demand combined with the impact of the monsoons. However, we expect volume growth to average ~5-6% in FY20 on the high base,” Anand Rathi said in a report.