Cement sales dip in face of currency rationing

The urban real estate market, which contributes 15% to the annual cement sales, took a sharp hit

The cement sector has been seeing 10-20% drop in sales owing to currency rationing in the wake of demonetisation.

The individual housing builders segment, which constitutes 45% of the entire cement market, has taken the brunt with dealers reporting frozen sales since the government announced the demonetisation move.

According to a report from brokerage firm Motilal Oswal, houses constructed under this segment are typically bought in cash and the cement dealers expect this section of the market to be severely impacted as severe liquidity crunch has followed suit.

“Volumes for majority dealers were impacted by 50-80%, compared to average volumes recorded in the first week of November,” said an analyst with the brokerage company reasoning that demonetisation has led to a sharp reduction in the availability of cash with clients, resulting in reduced purchases.
 

The urban real estate market, which contributes 15% to the annual cement sales, also took a sharp hit as developers had to arrange for funding of labour payments and other input materials such as steel.

Normally, cement dealers maintain a 50:50 ratio between cash and cheque or e-transactions. They also act as points of conversion of cash between clients and companies. They collect cash from clients and deposit the corresponding amount in the company’s accounts by real-time gross settlement.

“As dealers are not accepting old currency notes now, cash sales have reduced to negligible levels,” said the analyst cited above.

A report from Deutsche Bank Markets Research on the cement sector has factored in a 15-20% demand drop in the near term (until December 2016) and then a three% growth in the fourth quarter of the current year.

So far, Shree Cement has seen a decline of 10-15% in its sales last month, while Dalmia Bharat reported a fall of 15-20% in sales.
 

However, the above-mentioned companies along with Kesoram Industries (makers of Birla Shakti Cement), are of the view that the demand for cement is likely to pick up as the government speeds up its infrastructure projects.

“With the demonetisation drive and the government’s income declaration scheme, money is likely to flow into government coffers, which in turn would be pumped back into the economy,” said H M Bangur, managing director of Shree Cement.

Tridib Kumar Das, director of Kesoram Industries, is also optimistic that development of infrastructure such as roads, railways, bridges, housing for the poor, toilet construction and other related fields of work will be the government’s primary agenda.

“Most likely, the government will first speed up the infrastructural development work, which will translate into increased demand for cement and steel,” Das said, adding that the cement sector would be one of the first sectors to recover from demonetisation blues.

However, analysts caution that although the central government’s spending is likely to shoot up, the state government finances may come under some pressure, as 5-10% of their revenue receipts come from the property sector (hit by demonetisation) resulting in their infrastructure sector spends coming under stress.

“This could be mitigated if the central government passes on a higher proportion of its improved finances to the states,” said an analyst from Deutsche Bank in the report.

Das, however, opined that the pace of recovery from falling sales (at present) will depend on how much money the government is able to generate by levying a 50% tax on undisclosed income and the four-year lock-in period in the banks for the same. Also, the recovery will depend on the on-ground, practical implementation of infrastructural projects.

Mahendra Singhi, director at Dalmia Bharat, said the institutional segment, which operates on e-payment and takes up eight% of the total cement sales, has so far been shielded. Nevertheless, the dip in the retail sector has hit the sales hard.