The Cement sector marred by low infrastructure and industrial capex spending and slow housing demand since last 4 years was further impacted by GST implementation in FY18. Other impacting factors include, (a) ban on sand mining in few states (Bihar, Tamil Nadu, etc.), (b) pet coke usage ban in parts of North India, (c) rising pet coke price and (d) increase in diesel prices and ban on overloading, hurt the cement sector.
The spilled impact of demonetisation from FY17 and GST implementation during July 2018 on the cement sales volume recovered only in Q3FY18. The weak base of Q3FY17 due to demonetisation acquisition-led incremental volumes led to ~11% yoy volume growth for Q3FY18. However, the sales volume stood at ~3% for 9MFY18.
Muted pricing scenario:
On the pricing side, the cement prices on all India basis was up by 6% in Q1FY18, but were muted on yoy basis for Q2FY18 and Q3FY18. Considering the cement prices as per our channel check so far in Q4FY18, the all India average price is up by ~3%.
Eastern and Central region were the outperformer:
Eastern and Central India exhibited better volume growth as well as pricing so far in FY18 owing to (a) good demand led by government’s focus on infrastructure and housing and (b) consolidation and premium pricing. North was weighed down by poor demand scenario and increased competition. South was impacted due to sand mining ban in the biggest market of Tamil Nadu (lifted in Feb 2018) and price crash (4% down yoy in FY18 so far).
Silver lining in volume seen only post November 2017:
The DIPP data indicates revival in cement production from November 2017 onwards in high double-digit growth, after negative/flat growth in preceding 12 months. On yoy basis, the cement production is up by 4.4% yoy YTD.
Consolidation and ramp-up of capacities:
The sector witnessed ramp up in the acquired capacities (acquisition done in 2016) by UltraTech Cement, Orient Cement and Birla Corp. Another highlight for the sector was ACC-Ambuja merger being put on hold.
Demand and pricing outlook:
The cement demand growth is expected at ~3% for FY2018E and 4-5% in FY2019E, as per ICRA. Various companies have indicated that the demand outlook is robust for the next 5 years (high single digits) supported by government spending on infrastructure, irrigation and various schemes like Housing for All. Further, sand mining ban upliftment and acceptance of M-sand in various regions is aiding the construction activities. Additionally, the improvement in utilization levels of newly acquired capacities and capacity addition by few players (SCL, Orient Cement, etc.) would also lead to higher volumes.
However, we believe that intensifying fight over the market share and demand supply mismatch (higher supply) would continue to put pricing under pressure. We remain cautious on realisation improvement despite expected volume recovery. Though the cement producers in few markets have indicated sharp price hikes from the start of April, the implementation of the same remains a concern given the market share war.