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Rural demand supports cement sector growth

After coal, cement has recorded the second highest production growth among the 8 core industries in the first half of FY13

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Even as IIP growth remains sluggish and there are concerns of slower GDP growth, one of the few sectors that has shown resilience and has continued to grow is cement. Cement production has seen a 7.4 per cent growth during the first six months of current financial year. Within the eight core industries, that have a combined weight of 37.9 percent in the Index of Industrial Production (IIP), it has recorded the second fastest production growth.

During the first six months of 2012-13, coal at 8.3 percent emerged as the fastest growing sector, followed by cement. Cement production, after remaining slightly soft in August affected by monsoon, recorded an 13.4 per cent y-o-y growth during the month of September 2012.  Bhupali Gursale, economist at Angel Broking, says that cement has also been supporting the overall GDP growth.

Cement demand has remained strong largely driven by rural housing segment feels Ravi Sodah, cement analyst at Elara Capital. Sanjeev Kumar Singh analyst at Centrum also sees the rural retail housing demand to have been a major contributor to cement demand. Analysts also feel there is some support from urban retail demand as well.

Senior bankers have also said that there is an increase in new building activity in semi-urban and rural housing. The activity level at contractors is more now than what was seen three months ago. This is one indicator for the rise in cement demand.

While rural retail demand may have been the major driver, analysts feel that pre-election spending and some activity in the road segment too must have provided some traction. Uttar Pradesh, Uttarakhand and Punjab had seen elections earlier this year that provided good support to the demand in the north. The upcoming elections in Gujarat next month have contributed to the robust demand in the west. While cement prices in all the regions had seen some correction during September as the monsoon caught pace, prices in the west inched up by Rs 3 to Rs 299 per bag over August.

Even though there has been sluggishness in infrastructure activities, the only segment that has shown some uptick is the road segment, adds Sodah.

Geographically speaking, demand and realisations have been robust in the western, central and northern regions of the country. In the eastern region, it has been satisfactory while south India did not participate in the growth story. The Telangana issue in Andhra Pradesh has impacted the retail demand in the state feel analysts. V Srinivasan of Angel Broking, who tracks the cement sector, says that Andhra Pradesh is a major market in south India having significant capacities. Thus, with demand and prices remaining muted In Andhra Pradesh, the entire region faced the heat.

Moving forward, cement demand is likely to improve further. Though during the ongoing festival season, cement demand and hence prices may see some softness, it is likely to be a temporary phase. With Madhya Pradesh state elections in 2013, demand in central India is likely to improve. Andhra Pradesh too is likely to see some bounce-back in cement prices. Srinivasan adds that demand in Tamil Nadu and Karnataka too has been good. Demand in Tamil Nadu has picked up almost a year after the state went in for elections.
Thus it is not surprising that most of the cement stocks such as ACC, Ambuja, UltraTech, Shree Cement, Madras Cements and JK Lakshmi Cement have seen their stocks hitting 52-week highs in October 2012.

 

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