The outlook for the cement industry continues to remain challenging with both demand and prices continuing to be under pressure, rating agency Icra has said.
"The demand for cement was sluggish during Q2 FY14 - a seasonal phenomenon - due to a slowdown in construction activities during the monsoon season," Icra Senior Vice- President Sabyasachi Majumdar said in a report.
"Contrary to expectations, cement demand failed to pick up even in the post monsoon season due to continuing weak demand from infrastructure and real estate sector, and shortage of labour due to festive season," he said.
Delays in environmental clearances for industrial and infrastructure projects and sand unavailability in some states contributed to the slow growth, Majumdar said.
Cement demand is expected to recover in the last quarter, driven by rural housing demand following increased incomes due to good monsoons and pre-election spending by state governments primarily on road strengthening and improvements, state highways and power transmission, Icra said.
It added, however, that the recovery is not expected to be significant.
Pressure on cement prices coupled with rise in raw material, domestic coal and freight costs has put pressure on the profitability of cement companies. The growth in cement dispatches on YoY basis remained sluggish in Q3 FY14 given the lacklustre demand from end-user industries.
According to Icra study, for most of the cement companies modest volume growth coupled with pricing pressures resulted in YoY decline in revenues in Q3 FY14.
The profitability margins also came under pressure in Q3 FY14 due to the inability to pass on the rising costs. Cement manufacturers had to absorb cost increases stemming from continued hike in diesel prices and rise in domestic coal prices by CIL.
As a result, the operating profitability margins for Icra sample declined from 17.1 per cent in Q3 FY13 to 14.6 per cent in Q3 FY14.
Muted demand, pricing pressures and cost headwinds resulted in muted performance of cement companies in 9M FY14. Cement prices continued to remain under pressure in Q3 FY14.
Majumdar said: "Though cement companies made a few attempts to raise prices in Q3 FY14, most of the price hikes undertaken by the industry were partially/fully reversed subsequently given the weak demand scenario."
Going forward, Icra expects the pricing flexibility for the industry will remain weak.
