Cement demand remained subdued during Q1FY14 after witnessing weak growth of nearly 5.5per cent during FY13. This was impacted by lack of construction activity due to Infra and housing slowdown, labour shortage coupled with early onset of monsoons. However, cement prices continued to remain firm after witnessing declines during beginning of Q1FY14.

Cement demand growth

continued to remain sluggish in Q1FY14, impacted by continued weakness in Housing and Infrastructure verticals. Capacity utilization is likely to remain soft. Dealers across regions highlight limited near-term visibility of demand recovery. However, they are hopeful that the election impact would play out in favor for demand uptick in H2FY14, resulting in 6-7per cent volume growth. The demand remains sluggish in most regions and may worsen in the next one month due to monsoon and prices are likely to fall further. Overall, while visibility remains weak for the near term, medium-term demand outlook remains optimistic with several infrastructure/power projects underway.

Weak pricing scenario – lowest since Q3FY11

Cement prices witnessed a bounce-back in the month of May 2013 after two consecutive months of decline. On a pan India basis, they increased by Rs.15 per bag in this month.

However, this was a repercussion of the increase in coal prices and an earlier hike in railway freight charges. Cement producers passed on these cost hikes to their consumer and tried to regain some pricing discipline.

Though prices staged a recovery late in the quarter (post May 15), poor availability of construction materials (sand and bricks), and the early arrival of the monsoon restricted further price hikes. Cement prices in Andhra Pradesh remained low due to political issues impacting construction activities. However, on account of high base prices of last year, cement prices are down 2.3per cent y-o-y, with South (down 4.5per cent y-o-y) being the worst affected region followed by East (down 3.6per cent y-o-y). Cement prices in northern region witnessed correction during beginning of Q1FY14 led by lack of demand and labor unavailability. However, prices have started recovering later and currently range around Rs.270-275 on an average in northern region. Prices have remained largely stable in eastern India but may witness correction as monsoon progresses and demand remains weak.

EBIDTA/tonne could decline due to cost pressures

Aggregate operating cost per MT is expected to grow by 3.5per cent y-o-y and 2.5per cent q-o-q, led by higher energy and freight cost. During the quarter, diesel price increased by 4.7per cent q-o-q, leading to higher freight cost. Power and fuel cost is expected to remain stable at the higher levels despite a 5per cent q-o-q fall in international coal prices, as the decline is partially offset by the rupee depreciation of 3.3per cent q-o-q.

Slowing capacity addition on account of huge surplus

Fresh capacity addition by the cement industry is expected to slow down as demand fails to keep pace with new additions. The industry’s production capacity increased to 325 million tonnes (mt) last fiscal as compared to 219 mt in FY09, registering a compounded annual growth rate of 10.4 per cent. Given the huge surplus situation prevailing in the industry, the pace of capacity addition could decelerate going ahead. The industry may add about 66 mt in the next three fiscals. Going forward, the capacity utilisation rate may improve gradually given the slowdown in pace of capacity addition and recovery in demand.

Outlook

For FY14 as a whole cement demand growth is expected to remain muted at ~6per cent. Profitability for national players could come under pressure if they are faced with increased supply from regional players. The current fiscal is expected to see capacity additions of 30 mn tonnes. FY14 is likely to surprise positively on demand front (though back ended) with a line-up of large state elections. Pricing is expected to remain stable to buoyant as well. Going forward, we expect cement demand to improve in H2FY14 on the back of benefits resulting from likely decline in interest rates, pre-assembly and general election infrastructure spending, pick-up in individual housing/affordable housing and improvement in the execution of stalled projects.

Companies having a strong presence in the southern part of the country may fare well as compared to those located in the northern part as the demand in the southern region looks stronger as compared to that of in northern India.

Post monsoons, prices are likely to firm up led by demand improvement on pre-election spend as well as improved pace of infrastructure awards. One could pick stocks in this sector in the monsoon related weakness as demand revival is expected in H2FY14.