Street cuts FY20 growth estimate as demand woes continue for cement players

Prices remain on a declining trajectory, slowdown in government projects led by delay in payments continues to hurt industry

Cement stocks continued their downward spiral on Tuesday with ACC, Ambuja Cements, UltraTech Cement and Shree Cement losing more than 4 per cent on the bourses. In fact, Ambuja Cements hit a fresh 52-week low. Analysts say that their channel checks suggest that demand woes continue for these players with August cement volumes continuing to disappoint, and this is putting pressure on cement prices month after month.

Binod Modi at Reliance Securities says that dealers opine that continued slowdown in government projects led by delay in payments continues to hurt the industry. After the first quarter of FY20 seeing slower project execution on account of general elections and lower availability of labour adding to demand woes, the disappointment has continued in the second quarter, which otherwise is also a seasonally weak period with monsoon impacting construction activities. Also, with demand disappointing so far in the September quarter, it’s not surprising that growth estimates for FY20 are being tweaked by analysts. Rating agency, ICRA says domestic cement demand growth is expected to slow down to around 7 per cent in FY20 as compared to 13 per cent during FY19.

Cement prices are also correcting and August has seen the average price of a 50-kg bag fall by 3.1 per cent over July suggests JM Financial’s channel checks. This has been led by a steeper correction in the South (6 per cent), which in turn impacted prices in West (down 5.9 per cent). While East also saw a marginal decline of 2 per cent, prices in the North and Central India remained stable. Though analysts such as Modi suggest that some price hikes have been taken recently in certain pockets in South India and Maharashtra, they aren’t big enough (compared to price decline seen in the past) and their sustenance holds key and will be monitored closely.

Meanwhile, with South India having seen maximum pressure on pricing, analysts remain cautious on players having higher exposure to the region and South India-based cement manufacturers. Analysts at Elara Capital say that they prefer firms with a higher presence in North and Central India and the Northeast (such as JK Lakshmi Cement, HeidelbergCement, Prism Johnson and Star Cement), considering a better demand-supply scenario. Amongst pan-India players, analysts remain positive on UltraTech due to its diversified regional presence and expanded capacities to meet any uptick in demand.