Coronavirus impact: Cement sector to see double digit dip in volumes

For the cement sector, recovery would be prolonged by the depressed real estate sector, muted spends on Pradhan Mantri Awas Yojana (Urban) and lower Capex (capital expenditure) by the government

The cement sector is projected to witness a double digit decline in volumes in FY21 after the outbreak and the rapid spread of Covid-19 pandemic.

Industrial and manufacturing lockdowns imposed to contain the spread of the lethal virus have led to a shrinkage in household income and sluggish business conditions, apart from posing risk of a cut in government spending on infrastructure since the fiscal deficit is widening.

“The outbreak of the pandemic has put at risk our prior thesis of a gradual recovery in cement demand in FY21. We were earlier expecting a mid single-digit growth over the slight fall in volumes in FY20. It is quite likely to see a double digit decline in volumes in FY21,” said a report by DSP Investment Managers.

Earlier, ratings agency CRISIL had forecast cement demand to tumble by 10-15 per cent in this fiscal owing to the extension of the lockdown and social distancing measures till April end, indicating a washout in Q1FY21. Demand for the cement sector is likely to gain some steam in Q2, or the July-September period.

For the cement sector, recovery would be prolonged by the depressed real estate sector, muted spends on Pradhan Mantri Awas Yojana (Urban) and lower capital expenditure (Capex) by the government.

Contracting demand from consuming industries is poised to pull down the cement sector’s capacity utilisation level to 56-58 per cent, magnifying pain for the cement companies from the weakness seen in last fiscal. However, despite muted demand, the cement sector was able to record a firm price hike of Rs 25 per bag in FY20, partly aided by the continued consolidation in regional markets by the largest player.

“Cement prices are the key. We expect that given the demand scenario, the industry will focus on profitability and hence have stable cement prices. The balance sheet of most cement companies is quite comfortable despite the capacity additions in the recent past. Quite a few of the companies are now trading at trough valuations and below the replacement cost, making it an opportune moment in our view to position us for the recovery in FY22”, the report from DSP Investment Managers predicted.