CAUTION: WET CEMENT AHEAD!
By Ruma Dubey
Can you believe it? The Kumbh Mela at Allahabad is responsible for the fall in cement demand! This seems like a very illogical and farfetched reasoning but apparently, with most of the laborers, hailing from Bihar and UP, rushing to Allahabad during these months for a holy dip to wash away their sins, there was nobody to work at construction sites. It seems building activity, be it civil or home construction came to a standstill. Thus, no building, so no need for cement and this is how the cycle of life worked for the sector in Feb’13.
October to March is the peak season for the Cement Industry. In FY12, the industry saw a nine percent surge in demand during this period. Actually, last fiscal was pretty good for the sector as has been reflected in their financial performances but looks like, this year’s ‘peak season’ has put the companies down in the deep.
The first eleven months of the current fiscal FY13 shows a growth of 5% and the remaining one month is not expected to change the scenario in any way. Let’s face it- the second half for the Cement sector which seasonally its best may not turn out to be as good in this fiscal.
The cement dispatch and sales factor reported by cement companies for the month of Feb’13 is not very encouraging. Ultratech, India’s largest cement maker reported a six percent YoY drop. Ambuja cements and ACC have stopped releasing their monthly sales figures but industry insiders say that they too would have had a 5-6% drop in sales for the month of Feb’13. This is the story of large cap cement companies and the story is not very different for the mid caps too. The toast of the mid caps cement sector, Shree Cements reported a 16% MoM decline in sales and the YoY dip is expected to be around 10%. This clearly means that if the large cap companies have suffered decline in single digits, the mid cap and the small cement companies have dropped in the double digits. Finally, the coin drops- cement sales are down.
While this data shows that the cement sales are down, it is in direct contrast to the Q3 GDP manufacturing number which showed a growth of 2.5% v/s 0.7% (YoY). So clearly, manufacturing activities was not led by cement at all. Cement is mainly used for infra build and constructions and the Q3 construction numbers show that the YoY growth was down from 6.9% to 5.8% and QoQ is down from 6.7%. Thus, the fall in quarterly construction numbers can be correlated directly to the fall in cement demand.
It would be unfair to blame the entire fall in cement sales on the Kumbh Mela, it was just one month but the rest of the months, starting from Nov’12, demand which should have been at its peak remained largely flat. Industry experts blame this on the cold weather in North but then, isn’t every year cold starting from November? Instead of trying to come up with reasons for low demand, it is best if we accept the one big reason- there is no activity when it comes to building infrastructure and sluggish home demand has led to a slowdown in the realty sector too. What we are seeing today is a reflection of this, something like a contagion.
But if you are looking for a sudden surge in demand from FY14, Industry experts like prophetic doomsday say that H1 FY14 will also remain largely sluggish. This as such is the lean period for the sector due to peak summer followed by monsoon. And, seconding the same thought process are many brokerage houses which have scaled down their earnings estimate for cement companies in H1 FY14 by 3-5%. They expect margins to be subdued due to slow growth in demand and higher costs; companies may not be able to pass on costs through price hikes when demand is low. Thus, many expect realizations to remain subdued.
Today cement prices are up around 5-7% on a MoM but this has got nothing to do with demand as the above mentioned numbers indicate. It is more to do with higher costs and majorly due to supply bottlenecks.
Looking ahead, capacity utilizations are expected to remain low at around 75-78% for FY13 and ditto for FY14 too. And new capacities are expected to add on to the surplus, keeping demand low. In FY11, the installed capacity was at 287 million tonnes (MT) and this went up to 306 MT in FY12. Capacity is expected to be at 338 MT in current fiscal and in FY14, installed capacity is estimated at 363 MT. Unless there is a major push in infrastructure buildup or a pickup in realty sector, supply will continue to outstrip demand and capacity utilizations will remain low. One can only hope that interest rates start coming down which in turn will push up demand for homes and that naturally means, increased demand for cement. At the moment, there are too many ‘ifs’ and ‘buts’ in the cement story and it would be best to watch it build up as months go by. Yet if you have an unquenchable thirst to own cement stocks, to take advantage of better stock prices, then go for companies with low energy costs and high capacity utilizations. Who fits this bill? Shree Cement, UltraTech and Ambuja.