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Cementing Woes And A Dismal Future

Monday, June 04, 2012
By Manik Kumar Malakar

That most sectors that comprise the Indian economy are under pressure would not really be a revelation. However, most such sectors have some bright point in the horizon to brighten up prospects going forward.

The exception appears to be the cement sector which not only is under pressure, but a very dismal picture appears to sustain for the sector even going forward.

“The overall slowdown in industrial growth has depressed the sentiments,” says Sudip Bandyopadhyay, Managing Director and CEO of Destimoney Securities on the cement sector in India.

The anomaly arises from the fact that cement prices are down in May and have been under pressure from the past four to six weeks at least in terms of cement offtake according to analysis from brokerage Emkay. Remember that while cement does come down; both in terms of off take and prices; this is usually in the monsoon period and not so early.

“This is rather unusual of May as usually in May prices are hiked to exit at better rates so that the seasonal decline in monsoon prices are better,” agrees Milan Bavishi-Head Research-Inventure Growth & Securities.

The primary reasons for the same are a slowdown in the construction industry in India. “Slowing construction activity due to higher interest rates is one of the reasons for the decline in cement offtake,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global. “Also a shortage of labour due to a harvesting season,” is another off-beat reason for the woes of the cement industry.

So how bad has been the slide to date? ‘On an all India basis cement price are down by approximately 4% per bag,’ says brokerage Emkay in a review of the sector.

Pressures have been seen in the Western region that includes Maharashtra too. Emkay noted that cement producers in Gujarat had attempted to hike prices in the last week of April but failed to do so as this was not supported be demand.

‘In Maharashtra too, prices softened by Rs 5-10/bag and even though there is news about a possible round of hikes to be attempted by the producers, dealers suggest that current demand trends would make such a move very difficult . Prices are expected to go down further with the onset of monsoon season impacting construction activities,’ notes Emkay.

And in a few weeks an event will start in India that the rest of the country will look forward too but the cement industry with dread – the monsoons!

‘We have seen a 4.2% month-on-month decline in prices and expect prices to correct further with the onset of monsoons,” says Dubey.

“With the onset of monsoon, construction activities tend to become slow and sluggish. Therefore demand will be at the low ebb with lower price realization.

However, this is a cyclical phenomena and post-monsoon demand picks up with stability in prices thereof,” says K. Jayaraman of Bonanza. Perhaps, just perhaps this is something for the cement industry to look forward too.

Cement and the retail investor
K Jayraman of Bonanza Portfolio notes that other sectors offer better prospects for investors. “Cement as a sector is not a big favourite for investment as compared to other sectors like Banking, Pharma, FMCG, IT etc. Investors should be interested in top rated companies in any sector in today’s Market condition for general safety. “Equity prices could decline still by another 10-15% in the next two months. Therefore investors can buy ACC only on a decline and in the range of Rs. 975 to Rs. 1000 for a reasonable return before the year end” he says.

Construction woes
The overall demand from the Construction Industry was sluggish in May 2012 relatively for various reasons.The non-availability of sand at reasonable prices owing to shortage caused by the court order ban on sand mining in Punjab and Haryana and even in Andhra Pradesh is another cause. In many places sand prices have shot up by three times recently as compared to sand prices in January or February 2012.

A Similar situation on sand prevailed in Tamil Nadu during the second half of 2011 and got stabilized in a couple of months still at a relatively higher price.

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