Covid-19 to hit cement sector in near-term, say experts
Normal volumes are thus likely only from May, assuming lockdown ends as scheduled.
The nation-wide lockdown amid the outbreak of Covid-19 will have a significant near-term volume impact on the cement industry, say experts.
Based on the current situation, the March volumes of the commodity is likely to decline by 35-40% and April to be a washout, dealers say.
At a recent conference call hosted by Motilal Oswal to analyse the impact of the coronavirus outbreak, dealers said that demand was robust before lockdown.
Volumes had been growing at 10-12% YoY in east and 4-5% YoY in the west and central regions. Cement dispatches have been stopped completely post March 21, and all major cement plants are shut now. Moreover, all construction sites have stopped work following the Union home ministry guidelines.
Dealers further said that volume loss from the lockdown is estimated to be around 40% in March and 60% in April. The shutdown has come at a time of peak construction activity. Once the lockdown is over (currently April 15), it is expected that it would take another 10-15 days before construction activity normalises as most of the migrant labour force has gone back to their hometowns.
For companies as well, it would take 2-3 days to fully ramp up the plant post restart. Volumes in April would thus be minimal (down >60%). Normal volumes are thus likely only from May, assuming lockdown ends as scheduled. Volumes lost during the lockdown period can't be recouped, Motilal Oswal said.
Current fiscal's fourth quarter (Jan-March 2020) volume may thus decline by 8-10% YoY (as against 2% decline in 9MFY20). Dealers are holding only 3-4 days of inventory. Some stock-transfer inventories are stuck outside state borders as movement of goods has stopped suddenly.
Companies would also be holding some inventories in plants and warehouses. Since cement has a shelf life of two-three months, there should not be any loss from the same for both dealers and companies.
Except the Mumbai market, non-trade sales are billed in companies' books but these are generally backed by secured letters of credit (LC) from the customers and hence should be settled in a timely manner.
Dealers generally provide unsecured credit to customers in this segment, which generally makes up for 60% of volumes. While 70% of the customers who buy on credit make payment within 3-5 days to avail cash discount, others avail full credit period of 30 days. Once the lockdown is lifted, dealers may have to extend additional credit of 10-15 days to customers for making payment, thereby increasing working capital.
In order to give relief to dealers, companies have communicated that they would consider the sales made till March 21 on a pro-rata basis to calculate the monthly incentives.
Cement prices have been buoyant this quarter with all-India average price up by Rs 13/bag QoQ in 4QFY20 (+3.5% QoQ and +5% YoY), which bodes well for margins. Region-wise average QoQ price hikes in 4QFY20 - east: Rs 20/bag, +6% QoQ, +5% YoY; north: Rs 15/bag, +4% QoQ, +16% YoY; south: Rs 3/bag, +1% QoQ, -4% YoY; west: Rs 13/bag, +4% QoQ, +4% YoY and central: Rs 9/bag, +3% QoQ, +9% YoY.
Given increased working capital and no revenue currently, dealers have sought relief from bankers toward interest payment, credit limits. Moreover, while cash inflows have stopped, fixed costs shall continue to be incurred by dealers on account of rent and staff salaries, creating a further liquidity stress.