Cement companies have recovered from the shock of demonetisation much earlier than expected. Management commentary and results for the December-ended quarter show that the impact of demonetisation was not as severe as anticipated.
UltraTech Cement Ltd's December-quarter results showed its volumes were marginally affected - domestic sales volumes declined 2 per cent at 11.01 million tonnes (MT), less than estimated by analysts.
ACC Ltd said that the slowdown seen after demonetisation has eased and that increased government allocation in the Union Budget for infrastructure development, housing, roads, and railways is expected to boost demand for the cement and concrete industry during 2017.
HM Bangur, Managing Director of Shree Cement Ltd said, 'Sales have been definitely down and demand is lower by 10-11 per cent in the markets we operate in, which is both east and north India. In fact, it should be very positive in the next three months,' adding that the sector typically grows 5-6 per cent every year. Shree Cement reported a rise in both standalone net profit and sales for the third quarter ended 31 December.
JK Lakshmi Cement Ltd said that despite the lowering of demand due to demonetisation, its production and sales grew 6 per cent and 4 per cent respectively in the quarter ended 31 December.
'The housing sector had immediate impact, but the dealers were fast in adopting non-cash methods of payment. However, it may still take a few more months for things to fully stabilise,' said Dr. Shailendra Chouksey, Whole-time Director, JK Lakshmi Cement. Chouksey said activity in the infrastructure sector has slowed due to migration of labourers and labour contractors, but the recovery in this segment will be faster than other sectors.
According to HDFC Securities Analyst Ankur Kulshrestha, the sector was initially expected to take a debilitating hit, but companies seem to have handled it well. 'We expect companies in our coverage universe to register only 2.5 per cent de-growth in volumes, while realisations are expected to remain flat year-on-year,' Kulshrestha wrote in a 10th January note to clients.
According to brokerage firm PhillipCapital, cement manufacturers in the southern states are expected to report high double-digit growth in the third quarter ended December 2016. However, companies selling in other markets are likely to report weak results, it said.
'As per our dealers' check, the north and central regions are most impacted due to demonetization, while the southern region is least impacted (because of fewer cash transactions in south India versus north/central),' Karvy Stock Broking said in a January report.
The Indian cement industry is estimated to have a capacity of about 420 MT. ACC, Ambuja Cement Ltd, UltraTech and Dalmia Cement Ltd command about 40 per cent of the market. The majority of output - about 60 per cent - goes into housing, followed by the infrastructure and commercial sectors.
Centre gives a push to cement transport via waterways
In keeping with the objective of the government to make cargo movement on National Waterway 1 (NW-1) Ganga a regular feature, an Inland Waterways Authority of India (IWAI) vessel MV Zakir Hussain set sail from Haldia to Patna carrying 350 tonnes of cement consignment of Dalmia Bharat Cement on February 5, 2017.
Other cement majors like Shree Ultra, UltraTech, Jaypee, Ramco and ACC have also shown interest in transporting their cargo through NW-1, which is being developed under the Jal Marg Vikas Project with technical and financial assistance of the World Bank at an estimated cost of Rs 5,369 crore. The project will provide for commercial navigation of vessels with capacity of 1,500-2,000 tonnes.
'Dalmia Bharat Cement has assured 1.20 lakh tonnes of cement to be transported from its plant at Salboni in East Midnapore district to various destinations on NW-1 in Jharkhand and Bihar,' IWAI said. Phase-I of the project covers the Haldia-Varanasi stretch.
Inland waterways present a very cost-effective, environment-friendly and congestion-free mode of transport.
The project includes development of fairways and three multimodal terminals - in Varanasi, Haldia, and Sahibganj - strengthening of the river navigation system, conservancy works, modern River Information System (RIS), Digital Global Positioning System (DGPS), night navigation facilities, modern methods of channel marking and construction of a navigation lock at Farakka.
Entry of new players can depress cement prices
The entry and expansion of new cement players into larger markets is likely to increase competition. While new entrant Emami Cement Ltd will focus on Chhattisgarh and West Bengal, JSW Cement Ltd has aggressive expansion plans for the west and south regions. Meanwhile, Vadraj Cement Ltd, formerly called ABG Cement Ltd, will enter the western markets of Gujarat and Maharashtra. All three entrants will put pressure on prices and increase competition.
With Vadraj Cement and JSW Cement together adding a combined 6 million tonnes per annum (mtpa) by FY2020, capacity utilisation in the industry may remain around 80 per cent or below. 'With virtually no change expected in pan-India utilisation levels in FY18 (versus FY17) and only modest improvement in FY19, we see little scope for margin-accretive cement price hikes. We believe the hikes, at best, will be to pass along cost pressures,' said a Religare analyst. 'Expansion of regional cement companies to other states will lead to increased price volatility. A month after Vadraj Cement announced its plans to set up a plant in Gujarat, cement prices in that market fell from about Rs 260 a unit to Rs 200, the analyst said.
FMCG major Emami group, unveiled its cement brand in October last year and said it was looking to scale up its cement production capacity from 4 MT to 15-20 MT in 3-5 years. The group has budgeted as much as Rs 9,000 crore for the proposed expansion and is also exploring opportunities for acquisitions.
Shree Cement from Rajasthan has stepped into the eastern market which has seen several new entrants, keeping prices depressed for the past year. Shree Cement is also planning to enter Karnataka in fiscal 2019 with a 4 mtpa plant. JSW Cement plans to increase its capacity five-fold from the current 6 mtpa to 30 mtpa by 2020. Last month, the company agreed to buy a controlling stake in Odisha-based Shiva Cement.
However, HM Bangur, Managing Director of Shree Cement, has a different view on the probable price fluctuations. 'Cement demand in India is on the rise with about 6 per cent growth per year, compared with depressed demand in European markets. India will continuously need newer capacities for the next 20 years to meet the expanding demand. If the cement industry does not expand, there will be a shortage within a few years,' Bangur said. 'For example, cement demand in south India is more than 80 MT; an addition of 2-3 MT will not have any adverse impact as that much capacity will be absorbed in the natural course. I don't see any price volatility.'
Source: LIVEMINT, DNA