Cement production numbers: Reading between the lines
Cement companies have not been having a good time on the bourses in recent months and this is not surprising considering their weak fundamental performance. While there are several issues before the sector like excess capacity and input cost pressure the most pressing one seems to be the slack demand that is impacting the production of companies.
July 15, 2011 / 19:41 IST
By Arnav Pandya
Cement companies have not been having a good time on the bourses in recent months and this is not surprising considering their weak fundamental performance. While there are several issues before the sector like excess capacity and input cost pressure the most pressing one seems to be the slack demand that is impacting the production of companies. Unless and until there is a robust growth in demand it is unlikely that there will be much sustained improvement in the sector. To get a proper view into the situation let us consider the figures used for calculation of the performance of the core industries that is released by Ministry of Commerce and Industry, Government of India. Annual situationRecently the index for the core industries has been revised from the earlier six industries to eight industries. Even though this is production data the figures give a reasonable idea about the demand situation in an indirect manner. In terms of the last several years the annual rate of growth in the production in cement was 12.4% in 2005-06 which progressively declined over the next three years to 7.2% in 2008-09 when the financial crisis hit the markets. What this shows is that even during those tough times the growth rate in production still remained quite high. 2009-10 saw a revival in the production as the figure once again crossed the two digit growth rate to touch 10.5% but this could not be sustained in 2010-11 as the figure dropped to 4.5%. This is one of the lowest figures in the past many years and is also somewhat expected considering the large base that has now been built up for the sector. Further deterioration As if this kind of slowdown was not enough the first two months of the current financial year have turned out to be worse. Both in the months of April and May 2011 there has been a negative growth in the production of cement as reflected by the index. The situation is worrying and investors are getting a bit unnerved is due to the fact that the fall of 1.1% in April was followed by an even higher fall of 2.3% in the month of May. In the same period of last year there was a robust growth of more than 8% in both the months. While the past years figures may have contributed to a higher base the negative figure also reflects the fact that there is weakness in demand that is forcing the companies to go slow on production.AnalysisIf the monthly production figures for the last year are considered in detail then it is evident that the cement sector is struggling on the production front. From June 2010 there has been a slowdown in production and it was actually the massive rise in production in October of 18.5% that saved the figures for the year. Again during the last couple of months of the fiscal the growth in production again climbed to 6.5% but this could not be sustained and the result was evident over the next two months that fall in the current financial year. Now the main question is what will happen in the coming months and the ray of hope here is that the next three months were quite weak in terms of production last year. So if there is even some small rise in demand that pushes up production then this will reflect in the figures but the real challenge would be to sustain this over a longer period of time.ImpactThe impact of this entire situation has been visible on many cement stocks that have fallen over the past few months leading to a negative return as well as underperformance in comparison to the broader market. If there is a sudden jump in the production figures then a short rally can be expected in the stocks but unless and until this is sustained the going will be tough for cement stocks. An improvement can only happen if there is a strong demand pull from both construction and infrastructure and till this is visible there is likely to be low key action in the area. Disclosure: The writer does not hold any shares in the companies mentioned here.Disclaimer: This does not represent any recommendation to buy or sell shares in the companies mentioned above. Readers are requested to consult their financial advisor before taking any financial decision. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
