NEW DELHI: With government-led construction activity remaining weak and housing demand refusing to pick up, cement manufacturers are staring at another quarter of weak demand and declining margins.
According to channel checks run by brokerages, overall demand has been muted so far in the current quarter (Q3FY20), growing at just 2 per cent year-on-year after having contracted by 2 per cent during the first two-quarters of the fiscal.
The fall in demand combined with a supply glut in certain regions has also led to a fall in All-India cement prices, though the North and Central regions are recording significant demand growth.
“Cement demand in October 2019 (latest available official data) has shown a decline of ~7.7 per cent per cent y-o-y, pointing towards a weakness in demand…Year-to-date growth has also declined by 0.5 per cent. This was the first YTD decline in FY20,” noted Centrum Broking analysts, adding that channel checks indicate the general lull in economic activity has prompted demand deferment in large parts of the country.
“This is due to weak construction activity from unseasonal rains, low government spending and low housing demand,” Motilal Oswal’s report observed.
In parallel, all-India cement prices have fallen by about 3 per cent compared to the previous quarter and by 9 per cent from their peak in May this year. “We estimate that the sector margin will contract sequentially in Q3FY20, mostly in the east and west, where prices are down by 4-5 per cent QoQ,” Centrum Broking said.
This is set to have an impact on the profit margins of cement companies, especially those with high exposure to the west, east and south Indian markets where analysts expect a 10-15 per cent fall in net margins.
Motilal Oswal analysts believe that the recovery will be “slow and gradual”, with only one per cent demand growth for the full fiscal.