Prices likely to remain volatile, as year-to-date demand is up only 3.5 per cent
Cement companies are unlikely to report strong earnings growth in the second quarter of FY12. While the monsoon months are not the best for cement demand in India, stagnating infrastructure projects and sluggish demand in the real estate sector have hurt cement companies. The sector has been hit from all sides this year, as inputs prices have gone up sharply and demand has been steadily decelerating.
However, analysts are divided on where the sector is headed. For that, it’s imperative to get a sense on the expected demand scenario. With prices remaining flat, as of now, the south looks the bleakest in terms of demand, with little sign of an uptick. Dealers in the northern and eastern parts of the country are expecting to see an uptick in demand after the festival period. Emkay Global says that even as July-August despatches grew eight per cent on low base, demand is yet to reflect strength. “A solid pick-up in demand remains a key trigger to sustain the ensuing seasonal price uptick,” it says.
According to channel checks by Deutsche Bank’s global markets research team, many wholesalers/retailers and marketing personnel are seeing significant new inquiries for cement deliveries in the second half of FY12. “Accordingly, while year-to-date demand growth has been 3.5 per cent year-on-year in April to August, we estimate at least eight per cent growth in the second half of FY12, followed by a nine per cent (estimated) CAGR in FY12-14.”
However, not all analysts are optimistic about the demand situation and pricing power this fiscal. Edelweiss Capital says, “Cement prices are estimated to have declined sharply (6.7 per cent quarter-on-quarter) in the second quarter of FY12, due to no production discipline across regions (except south). Second quarter results are expected to be bad, with the Ebitda/tonne likely to decline by more than 50 per cent quarter-on-quarter for major companies.”
Going by the demand scenario in the real estate market, cement demand may not revive significantly to improve utilisation. Analysts expect the sector to remain volatile this year and the next, as the first and second quarters would remain subdued and the third and fourth would see good demand.