Cement sector may take 15-20% demand hit on demonetization

Post currency demonetisation, the cement sector is likely to witness 15-20% demand drop until December 2016 and subdued 3% growth in the fourth quarter of this fiscal, a report said.

"We now factor a 15-20% demand drop in the near term until December 2016 and then subdued 3% growth in 4QFY17. Investors believe that the drop in near-term demand is likely to be severe.

"The demand may see subdued 3% growth in Q4FY17 and upturn is expected only in FY20 as compared to FY19 earlier," Deutsche Bank Markets Research said in its report here.

"We see some infra sector demand offsetting weakness in demand from the housing segment. We may also see a gradual reduction in mortgage rates, which could bring back some genuine demand," Research Analyst Chockalingam Narayanan said.

"Looking at the demand-supply model, we expect the regional balance to first shift in favour in Northern and Central India. Eastern India is likely to see the largest reduction in utilisation over the next 12-18 months," Narayanan said.

The cement sector is hopeful that infrastructure projects to offset weakness in realty sector.

With the government's balance sheet likely to be in a much better fiscal position, the industry expect a sharp pick-up in infra demand - in line with the government's vision to push public spending.

Currently only road and railway sector spending is primarily driven by central government agencies.

State government finances, on the other hand, may come under some pressure, as a good 5-10% of their revenue receipts come from the property sector.

To that extent, their infrastructure sector spend - on rural roads, urban development projects (metro/mono-rail), affordable housing, irrigation, etc may be impacted.

"This is likely to be mitigated if the central government passes on a higher proportion of its improved finances to the states," the report said.

The sector was expecting 55-65% of demand from housing (35-40% rural and 20-25% urban); 17-20% from infra and 25% from institutions and commercial realty.

In urban housing, the already subdued levels over the last 3-4 years may be prolonged but may not necessarily deteriorate, the report said.

Commenting on cement prices, Narayanan said, following demand volatility, we anticipate a correction in cement prices in the near term.

Looking at our cost curve analysis, however, we don't expect a very sharp deterioration in cement prices on a sustained basis.

Currently, a good 30% of players are not breaking even on a cash cost basis.

If this were to take into account the recent spike in fuel costs of both pet coke and imported coal, at current prices over 43% of the industry would not be at break even.

To that extent the room for prices to correct on a sustained basis looks low, he said.