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Cement dealers expect significant slackening in sales this fiscal: Crisil

Business Finance

Press Trust of India  |  Mumbai 

Cement dealers expect a significant slackening in sales, elongated credit period to retailers and higher working capital needs in the wake of COVID-19 this fiscal, rating agency Crisil Research has said.

The survey, conducted with more than 100 dealers spread across tier 1 and 2 centres in 13 states, noted that nearly 93 per cent of the respondents expect volumes to shrink 10-30 per cent in fiscal 2021 in the base case scenario with the lockdown easing in May.

To further contain the spread of pandemic, the government has announced lockdown 4.0, but has relaxed the lockdown norms in the green, orange and red zones, while the containment zones continue to see no activity.

According to the survey, 70-80 per cent dealers felt individual home builders would delay new construction due to gloomy business outlook, fear of income loss,labour shortage and uncertainty with respect to resumption of normalcy.

It further stated that over 60 per cent of dealers are holding low inventories (2-4 days), but spoilage concerns persist.

"Dealers are hopeful of liquidating inventory by offering discounts as soon as the lockdown eases, to contain spoilage and get volumes going," it said.

On the other side, payment delays from retailers appear inevitable considering these players are small and fragmented, and most likely to delay payments amid liquidity crunch, gloomy demand outlook, and cement spoilage concerns.

That, in turn, would stretch the receivables cycle and negatively impact cash flows of the dealers, as much as 95 per cent of whom offer credit, the survey said.

"The cycle of recovery of retailer dues is expected to extend by 4-6 weeks over and above the usual four weeks. This will potentially increase the working capital requirement of dealers by 12-17 per cent, even as they reduce credit exposure, infuse capital, and curb non-essential expenditure," Crisil Reseacrh Director Rahul Prithiani said.

It further said elongated working capital cycle could last at least a couple of quarters, and the risk of retailers defaulting on payment dues would aggravate the financial pain.

"However, the collateral-free MSME loans announced by the government on Wednesday will come as a big relief, since it will help cement dealers access working capital debt," it said.

As per the survey, more than 90 per cent of the dealers are hopeful of manufacturers' support in terms of better margins/ incentives,or liquidity support to weather the hard times.

"But chances of a swift revival post ease in lockdown remain bleak, with 58 per cent of the respondents believing it will take over three weeks for operations to normalise," it said.

Another analyst Guranchal Singh said that an intermittent rise in daily wages, freight cost, and construction material prices will deter restart of construction activity.

"Return of labour, freight disruption and dwindling consumer confidence will weigh on resumption of normalcy in the near term," he added.

Crisil hopes improvement in the second half as demand picks up and receivable days gradually decline.

"But even here, recovery in urban areas may take longer due to extended lockdown, slowdown in real estate construction, and higher dependence on migrant workforce," it said.

The agency further said that few dealers are optimistic that the labourers, who have not been able to earn wages for nearly two months, would return quickly post-kharif sowing to capitalise on pent-up demand and halted construction activity.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, May 18 2020. 16:20 IST