Cement's strength will be tested if demand, volumes fail to pick up

Firm realisation and lower costs bode well for profitability

Stocks of major cement manufacturers such as Shree Cement, UltraTech Cement, ACC and Ambuja Cements have rebounded up to 39 per cent since March-April lows as easing of lockdown helped cement demand rebound, and in turn kept realisations firm. This, coupled with benign input prices has augured well for profitability. However, if volumes fail to pick up, it could again weaken investor sentiment.

After April sales remained significantly impacted by lockdown at just 15-20 per cent of normal, demand started improving and was better-than-expected in May aided by pent-up demand of previous two months, and decent traction in rural markets. In fact, construction activities in rural areas have remained uninterrupted in recent months on good labour availability.

Going ahead, too, traction in rural demand should continue in the back of good crop, normal monsoon, labour availability and government's welfare and social schemes. Overall, rural volumes are estimated to be in the range of 60-80 per cent of normal levels.

Amongst regions, eastern India being less impacted by the pandemic is recovering faster as compared to other regions, say analysts at HDFC Securities. This is positive for realisations in the region, which has seen significant capacity expansion in the recent past due to improved limestone availability. Demand growth in East and a lower fall in North and Central regions has helped in limiting the impact of a sharp fall in South and West regions, estimate analysts.

Domestic brokerage Prabhudas Lilladher's recent channel checks in the month of June suggests that all-India average prices are up 10 per cent (or by Rs 30 per 50 kg bag) over May, helped by pricing discipline and improving demand.

While things have been on the mend so far, there is some uncertainty on the way forward. For one, while petcoke and coal prices have been lower aiding margins, fuel (diesel) prices are rising and could lead to higher logistics cost. Moreover, with crude oil prices inching up, other fuels may follow suit.

Secondly, and importantly, unlike rural demand which is still below usual levels, demand in urban areas has been at 30-50 per cent of normal levels. So, overall demand is still lower than usual levels.

Analysts at Reliance Securities say that supply side issues have led to a sharp increase in prices, but there is uncertainty about how the demand scenario would pan out in coming weeks due to exodus of migrant labourers and funding constraints for projects. The onset of monsoon, too, should slow down construction activities. The recent demand may have been due to the rush to complete certain construction before onset of monsoon.

In a recent note, HDFC Securities, which is positive on most cement stocks, said, “Sales contraction is expected to continue in June, too, driven by continued sharp decline in non-trade segment. Demand is coming mainly from on-going projects. In our view, cement prices have peaked out in April/May and should cool off in subsequent months as demand picks up.”

However, in the absence on new projects and muted demand from real estate sector, the concerns are real. Moreover, there are likely constraints with respect to government projects, too, due to labour availability issues.

Care Ratings estimates a recovery timeline of 3-12 months for the sector and expects a negative bias in ratings. If indeed demand lags expectations, stock prices may come under pressure.