A projected lower offtake in the next quarter and reduced profitability have caused cement stocks to tank on bourses. Over the past seven days, the BS Cement index has fallen four per cent compared to a two per cent fall in the Sensex. Leading players have seen a 5-10 per cent loss in the past week.
Analysts attribute this to a cyclical fall in cement despatches, caused by the onset of monsoon. However, the impact is likely to be more severe this year. Early estimates indicate despatches will be as low as eight per cent in June, compared to double-digit numbers in earlier months. In the near term, analysts expect a squeeze of 200 to 300 basis points in the margins.
Even before the onset of the monsoon, prices had declined by around Rs 15-20 per bag across the country. With monsoon setting in, another decline of Rs 15-20 cannot be ruled out, say analysts. Ravindra Deshpande, a cement sector analyst at Elara Capital, points that the prices of raw materials are also on the rise. Hence, the squeeze would be stronger this time.
Cement, which has a regional market, has already seen a glut in the southern region. The commodity will see a lower demand in the North, too, as the excess demand from companies involved with creating infrastructure for the Commonwealth Games dries up.
To make matters worse for the industry, the situation looks grim even for the period after the rain, as excess capacity coming on stream would stifle margins further. According to analysts at Goldman Sachs, the “South India” dynamics that played out in the second half of the calendar year 2009 – when excess capacity and a sharp decline in prices were witnessed – will be replicated across all regions in the second half this year.
“This will make the next six to eight months one of the toughest phases, marked by seven-year low utilisations,” say analysts at Goldman Sachs. They expect a 400-basis-point squeeze in FY2011 margins.
Deshpande expects around 69 million tonnes of cement capacity to come on stream from 2011 to 2013. And, the demand during the same period is expected to increase by around 70 million.
However, a majority of the capacity addition (around 23 million tonnes) will come on stream in the first half of FY2011. Hence, there could be oversupply in the market in the medium term, he adds.
