INDIA: Cement prices slip on weak demand

Cement prices usually start rising from September when construction activity resumes after a lull during the monsoon. This time around, the trend seems to have reversed. Improved realization, on the back of robust cement prices that held up since January, did not sustain in October.

The key reason is weak demand, which hinges on capital and infrastructure expenditure. In fact, even the 5.5% year­on­year volume growth for cement in the September quarter was lower than that posted in the previous two quarters. What’s worrisome is the outlook on government spending. An Emkay Global Financial Services Ltd report points out that after increasing 30% year­on­year in September 2014, government spending contracted 11% last month, implying a growth of 4.3% in 2014­15 till date, as against 18.3% in the corresponding period last year.

Analysts reckon that the maximum demand is now coming from whatever activity is seen in the real estate market. Industrial capex is yet to trigger major upsides in cement demand.

A note from Religare Capital Markets says that a survey of over 40 dealers across 30 cities suggests cement prices have fallen in multiple regions during October­November as demand slowed down against expectations of a pickup after the festive season. Northern and eastern states have seen

the sharpest dip of around R10­30 per 50 kg bag of cement. A few pockets in the west and south are looking stable, although lack of major project announcements may see prices slip in December again, as supply exceeds absorption of cement.

What’s interesting is that in spite of weak demand and pricing challenges, large and mid­sized companies reported better operating margins in the last three quarters. This made investors bet on the cement sector’s recovery and cement shares posted decent returns in the past six months.

But they have lost steam on news of a dip in prices during a normally good period. Manufacturers, though, are still optimistic about a gradual but sure recovery in cement demand and prices over the next two years. It’s just that new capacity and lower­than­expected demand offtake in the last one

year are only slowing the pace of growth.

Meanwhile, the top five companies by capacity are trading at valuations of eight to 10 times the enterprise value to operating profit per tonne. The name of the game ahead is purely cement sales volumes, which is critical to determine revenue growth and rise in profitability.