Cement volumes to stay weak in first half of FY14

Analysts trim earnings estimates as realisations unlikely to keep pace with cost push

The first half of FY14 is unlikely to see any major uptick in demand for cement. Though third quarter gross domestic product (GDP) data does reflect a pick-up in manufacturing, this is not reflected in cement volumes. In the first 11 months of FY13, the cement industry has seen growth of five per cent, as demand has largely remained subdued. With costs rising (freight and power), cement producers have taken price hikes but analysts expect realisations to be weak. Most brokerages have trimmed earnings estimates by three to five per cent in FY14, as costs have risen and companies could find it difficult to pass these on.

The market was factoring in a growth in economic recovery and cement demand in the second half of the year. Despatch numbers show this has not happened. With the exception of a few states like Bihar, Madhya Pradesh and Tamil Nadu, demand continues to be muted. Now, analysts say demand in the first half of FY14 will continue to be weak, as there are no triggers for growth. Given that interest rates are still high and the infrastructure and real estate sector continues to struggle, demand for cement would remain weak.

Ambit Capital expects FY14 volumes to increase at eight per cent (earlier estimate of eight to nine per cent), after five to six per cent volume growth in FY13 (earlier estimate of 6.5-7 per cent). However, realisations are expected to grow five to six per cent as medium-sized players add capacity. Analysts say during the construction season in FY12 (October 2011 to March 2012), cement prices rose 13 per cent, backed by a nine per cent growth in demand.

Though all-India cement prices are up 5.6 per cent month-on-month in February, it is due to supply bottlenecks in select parts and higher costs. Additional capacity and new brand launches in select parts of the country are also putting pressure on pricing. For instance, Heidelberg has added capacity in the north, which has impacted prices in Jaipur and Delhi, says Emkay Global. Dealer surveys by analysts suggest demand remains weak both from the retail and institutional ends. Cement despatches of most companies have seen contraction in February. This implies that other than a few states, construction activity in most states remains weak.

Analysts say demand for cement is higher in states that are focused on infrastructure. Most analysts expect demand picking up in the second half on the belief that construction would pick up before elections. However, not much traction is expected in the first half of the year. Analysts are relatively more optimistic on companies which have lower energy costs and higher utilisation levels. Most are positive on UltraTech and Ambuja in the large-cap space and Shree Cement among mid-cap stocks.