Q2 earnings preview: Long rain spells bad news for cement companies

Cement industry, which reported a decline in volume growth in June 2019 quarter (Q1), is likely to post another rough quarter, as monsoon season overstays.

Company officials and industry experts said demand in September continued to remain weak and prices were under pressure in certain markets.

The first two months of Q2 is generally weak for the cement sector owing to monsoons. However, industry officials point out a longer monsoon has pushed weak demand onto to September as well.

“Demand in September was also weak as the monsoon impact was seen beyond August. I expect overall demand growth for the first half of this financial year to be at 3-4 per cent,” said HM Bangur, managing director for Shree Cement.

The current financial year has so far been an anomaly for the cement sector with a decline in demand growth seen in Q1. April-May typically sees higher demand due to an increase in construction activity before the monsoon, but the same was not the case this year. 

Industry cement volume growth in Q1 fell 3-4 per cent owing to elections and labour shortage, among other reasons, according to an UltraTech investor presentation for Q1. Company officials from South-based cement manufacturer Penna Cement said the demand in September continued to remain weak. 

“In July and August, the demand has been overall flat, compared to last year, while in September, there has been a decrease due to external factors,” said Krishna Srivastava, director of marketing for Penna Cement.

If analyst estimates are to go by, there would be a decline in volume growth for Q2 as well. Analysts at Prabhudas Lilladher expect volume growth for Q2 to decline marginally by 0.3 per cent on a year-on-year basis. The analysts attributed the sluggishness to prolonged monsoon, lower government spending and weakness in the real estate sector. Until Q1FY20, the sector saw a six-quarter double-digit growth rally for cement demand. 

In addition to a prolonged monsoon, economic slowdown is also impacting demand. “Given the current scenario of a slowdown, the demand has been impacted highly in Andhra Pradesh and Telangana. Maharashtra, Kerala, and Tamil Nadu have also been adversely affected in September due to the heavy rains in many of the districts,” Srivastava said. 

Bangur expects industry volume growth to end the financial year with 4- 5 per cent growth. “I expect this demand growth after factoring in the general slowdown,” he said.

The weakness in demand has also led to pressure on cement pricing. “According to our dealer checks, demand was weak also in September and we expect Q2FY19 to have closed with a 2-3 per cent decline in volumes against last year. This has been reflected in the cement prices over the past few months with quarter-on-quarter cement prices estimated to be down by 5-6 per cent,” according to Ambit Capital research.

Cement companies’ attempts to hike prices in certain markets were also met with rollbacks.

 “The cement companies increased prices in March in most markets. While the price increase sustained in April–May 2019, the prices declined in June 2019 in the southern markets owing to a demand slowdown along with supply pressure,” rating agency ICRA said in a September 30 note. 

Srivastava from Penna Cement said September allowed for an upward price movement of Rs 10 to Rs 15 per bag of cement compared to the previous month.

Cement prices for eastern and western markets were further cut in July and August. “In July, the prices declined in the eastern and western markets on a month-on-month (MoM) basis and in August, the prices declined in most markets on a MoM basis. This is due to a muted demand in July-August, majorly impacted due to monsoons,” ICRA note added.