Recovery unlikely for cement and capital goods sectors before Q3

The economy’s six-year low in growth of gross domestic product for the financial year’s first quarter (Q1, April-June) is in line with the weak performance of the capital goods and cement sectors. Demand is unlikely to return in the September quarter, said company officials. 

“Overall for the industry, the June quarter was a bad one. No major contracts were awarded, and it is not going to improve in the immediate future. Barring the government contracts, investment sentiment remains weak,” said M S Unnikrishnan, managing director (MD), Thermax. 

Industry officials peg capacity utilisation for the capital goods sector at 50-60 per cent, compared to 70-80 per cent a year before. The trend is similar for cement. Industry volume declined in the June quarter, after six quarters of double-digit growth. Capacity utilisation fell to 67 per cent in the quarter, from 75 per cent in January-March.

“The June quarter was unexpectedly low because of many reasons, including elections. The industry had hoped that demand will pick up,” said Shailendra Chouksey, director, JK Lakshmi Cement. “However, current trends do not point towards a pick-up in demand and bridging the gap caused due to lower than expected growth in the June quarter.”

According to an ICICI Securities note on capital goods, six of the 12 companies it looked at in engineering showed a year-on-year decline in order inflow for April-June. The combined order inflow (excluding Larsen & Toubro) declined four per cent from a year before. The note says domestic order intake was impacted by the general election; a flow from abroad enabled L&T to report a healthy inflow.

Vimal Kejriwal, MD at KEC International, said the only segment where his company was seeing a slowdown was the industrial segment of its civil engineering business, which had recovered a year ago. He expects better order inflow for the September quarter. “The second quarter will be better sequentially. The first half (of 2019-20) will not be as good as last year, which was expected,” he added. 

“Cement volumes in August have not been great; volumes are expected to be muted for this quarter. The December quarter should be better sequentially,” said Binod Modi, analyst with Reliance Securities. He expects cement volumes to grow by three to four per cent for the full financial year. 

Others like Unnikrishnan also expect some improvement in the December quarter for capital goods. “The December quarter will see some improvement. Private capex is still away by another 12-18 months. A couple of other government orders will be pushed to the fourth quarter or next year's first quarter,” he said.