Demonetisation and After | Positive Outlook
We visited cement manufacturers, channel partners, builders and contractors in north India for an update on the situation and outlook after the government's demonetisation move.
The channel mechanism in north India is very different from the south; channel partners aren't as happy, and this is a key reason for price volatility in this region. Even so, most partners sounded positive, especially on demand. A majority of them said that pricing is bound to improve in the region and that all players, including the large northern majors, appear to be in favour of better prices.
Prices should recover steadily in the north over Q4/Q1. The impact of demonetisation is now neutralised. Most of the respondents said that although demonetisation has had an impact, it was much lower than initially anticipated.
North India is a largely cash and carry economy. Most traders either adapted to the situation (accepting payments through bank transfers) or were accepting old currency even after 8 November 2016. In many cases, traders said that a lot of their outstandings were cleared in old currency; a few even recovered written off debts ' which kept the cycle up. Most channel partners/dealers we met complained of low net margins irrespective of cement prices. This is one of the key reasons why prices there remain more unstable despite high capacity utilisations.
Also the main reason why most price hikes in the north do not flow through as effectively as they do in the south, is because channel partners simply do not participate in companies' price hike announcements (a key issue that has remained unaddressed for long).
This segment has also not taken to e wallets and swipe machines and it demands more stringent laws for cheque returns due to the weak channel margin structure in the north. Ergo, almost all partners said that they are not in favour of moving to digital payments.
A 1-2 per cent charge on digital transactions, they say, is a very high cost ' one that would take away most of their margins. Barring a few, most dealers didn't have the mechanism for digital payments. It was said that the largest cement major rolled back the idea of installing swipe machines for channel partners. Trade associations here have approached the government to make laws more stringent for cheque returns, as issuing post dated cheques is the most common business practice there. A change in target customer segments has also helped a few manufacturers.
A few cement manufacturers have made a deliberate and smart shift in focus to accounts within their non-trade sales. These are a sub-segment of non-trade customers where the order flow is more regular, with no payment issues, and no extended credits. We understand that this deliberate shift has helped a few north-based manufacturers (such as JK Cement) to sail through demonetisation better. Construction of toilets and roads are some of the key demand drivers. Almost the entire channel expects prices to be up by a minimum (net) of Rs 25/bag over H1CY17.
We reiterate JK Cement as our top northern pick. Other companies like JK Lakshmi Cement, and Mangalam Cement are also attractive bets. Shree Cement will continue to command a premium due to its ability to perform well in all scenarios.