Bucking trend, Q3 could be tepid for cement firms
The three months to December could turn out to be rather disappointing for investors in cement stocks as prices remain stagnant, or show insignificant growth, in a quarter that marks the beginning of the seasonally strong period of demand for the industry.
According to various estimates, in the past two weeks, cement players have been unable to raise prices, and all-India selling rates have shown an insignificant growth of 2 per cent.
There are several factors that have discouraged cement players from raising prices in the December quarter.
Over the past three to four years, cement demand has shifted disproportionately to the non-trade segment from trade, which otherwise fetches higher margins and better realisations. The non-trade segment comprises companies, governments and other entities that directly buy cement from the manufacturers. Trade segment means manufacturers selling cement to distributors and dealers, which sell to retail customers.
Within the non-trade segment, infrastructure is driving demand but it is not enough to encourage players to raise prices as infrastructure segment accounts for 15-20 per cent of cement demand.
The trade segment attracts demand from housing sector, which generates 60-65 per cent of cement consumption. Since construction has slowed down in the housing sector, the demand from the trade segment has been fairly unstable and almost stagnant. Besides this, in the non-trade segment analysts point out that payments from the government entities have been slow. This has affected the working capital cycle, which in turn has created liquidity issues.
Incremental capacity addition has also been a key factor. In the next three years ending FY21, the industry would expand capacity by 60-65MT. This incremental capacity will likely limit any scope for players to raise prices as the focus would be on generating volumes instead of value. In such a situation, companies would not benefit from the softening in coal and diesel prices as they will have to pass on these benefits by selling cement at relatively attractive rates.