Cement firms' stocks crack on cash crunch

Manish Singh, a cement dealer in Deoghar in Jharkhand, has seen his business crashing ever since the demonetisation drive began on November 8. With buyers running out of cash, absence of card swipe machines and customers unaware of digital transactions, Singh says, “Business has come to a grinding halt.”

No wonder cement shares are bleeding on the stock exchanges, falling by as much as 25 per cent when benchmark indices have lost barely five per cent. Regional players JK Cement, JK Lakshmi Cement, Heidelberg Cement and India Cements have cracked 22-25 per cent. Bigger players are less affected. Ambuja Cements is down 18.5 per cent and ACC and UltraTech have seen declines of 13-15 per cent.

Cement stocks have been in focus since April, making gains despite poor fundamentals. Further, despite one of the best monsoon seasons—during construction slows down—in several years, cement stocks kept galloping in expectations of demand after the rains. 

Experts felt cement was becoming highly overpriced with the market offering 2018-19 premium on these stocks.

In the September quarter cement demand growth fell to 2.5 per cent from 5.5 per cent in the June quarter and 11.5 per cent in the March quarter. Analysts estimate the 440 million tonne cement industry will end 2016-17 with a growth of 2-2.5 per cent, down from 4.6 per cent in 2015-16.

The profitability and sales of cement companies will see a substantial downturn in the current quarter, which may also spill over to the March quarter. The impact of a good monsoon normally reflects with a lag of 6-12 months.

Real estate is generally seen as an industry where cash works and cement as an ingredient in construction is not insulated. With majority of cement bags sold at the retail level in cash, new purchases would be hit, analysts said.

“Cement is an organised sector and there is no problem between suppliers and wholesalers. The problem is at the retail level where customers deal in cash,” said HM Bangur, chairman and managing director of Shree Cement. He added unorganised parts of the construction industry like bricks and sand would be under pressure due to demonetisation. 

Cement dealers are trying to square off inventory because the average life of a cement bag is six weeks and dealers cannot hold on to stocks for long. Cement prices continue to struggle and with no uptick in demand expected in the near-term, prices are likely to remain under pressure despite this being the start of the peak construction season.