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North India's cement market, which currently accounts for 31 per cent of country's total consumption, is expected to make a recovery only by FY2017-18 on account of demand revival in the infrastructure sector, according to a report.
Historically, North India is a well-balanced market with high capacity utilisation, low fragmentation and little inward dispatch threat from other manufacturing regions. But a large proportion of the cement market is dependent on rural or retail sales, Ambit Capital said in a report.
"A confluence of growth impediments -- slowdown in rural sales, weak demand for organised housing and elusive infrastructure recovery -- have further deteriorated cement demand/pricing in north India.
"North India's large share in major infrastructure projects exudes hopes of demand upcycle, but we believe it will take until FY'18 for a meaningful recovery," it added.
In 2014-15, North India consumed 79 million tonnes or 31 per cent of India's cement consumption, the report said.
"While 2015-16 was mooted to be a recovery year, demand has worsened, as rural sales decline sharply, real estate inventory has hit an all-time high and infrastructure recovery remains elusive with weak government tendering," it said.
Increasing prominence of regional manufacturers in a market with limited logistic challenges (largely roads) has led to price wars. Now prices in north India are at a 35 per cent discount to south India, it added.
Regional players accounted for 51 per cent capacity share in 2014-15 as against 45 per cent in 2006-07.
North India is facing growth challenges, on account of infrastructure recovery remaining elusive and rural demand deteriorating significantly in the last one year due to poor rainfall, low subsidies, wage growth and paltry MSP hikes.
Besides, real estate business is facing liquidity constraints due to government's clamp-down on black money, the report said.
It has projected that North India will be a key beneficiary of the infrastructure ramp up in India, given a majority share in large infrastructure projects (roads, Delhi Mumbai Industrial Corridor, etc).
"However, a strong and sustained volume growth will take till 2017-18 as retail demand will recover with a few quarters lag to infra demand," the report said.
Regional manufacturers with scale and cost efficiencies will benefit the most in an infra-led cement demand recovery, it added.
Pan-India players trade at rich valuations, run earnings downgrade risks and do not have the best cost efficiency to meaningfully improve RoCEs, as volumes might grow but chances of a sharp pricing recovery are scanty, it said.
