Most cement companies witnessed higher margins during 1QFY20 owing to a strong pricing growth of more than 10 percent. However, the sector, as a whole, is now staring at an approaching gloom.
Brokerages believe that the industry volume may have declined during July and August due to heavy rains and slowdown in government spending.
"Industry volumes likely declined in low-single-digit year-on-year (YoY) during July-August 2019, impacted by heavy rains and lower government spending," said ICICI Securities in a report.
While the demand in North, South and Central regions appears to have been flat YoY during July-August, the West and East regions might have seen a decline in volume during the same period, the brokerage added.
Erosion in volume growth will put pressure on margin. Most companies are contemplating a price hike to offset the impact of declining volume.
Domestic cement prices declined 2 percent month-on-month (MoM) in August 2019 led by continuous price declines in the southern and eastern regions.
As per ICICI Securities, dealers across regions suggest companies are attempting a Rs 10-15 per bag hike from mid-September 2019 to avoid further fall in prices.
However, brokerages say that the sustainability of the price hike will be tested in the weak demand environment.
"We expect demand to remain subdued in 2QFY20 due to seasonal weakness and heavy rains and flooding witnessed in several markets. Companies with significant exposure to the South and East (i.e. Ramco, Dalmia Bharat and India Cement) are expected to witness 6-7 percent quarter-on-quarter (QoQ) decline in realisation, while the overall industry should witness 3-4 percent QoQ decline in realisation," said Motilal Oswal Financial Services in a recent report.
However, the next few quarters should see the industry benefit from easing fuel costs, which should partially cushion the impact of lower prices.
"Average petcoke cost in August was 15 percent lower YoY while prices of imported coal also declined 39 percent YoY and diesel prices declined 1 percent YoY. We expect companies to report savings in power and fuel costs in subsequent quarters due to the recent corrections in fuel prices," said Motilal Oswal.
The brokerage prefers companies that are moving down the cost curve, as well as, those that provide valuation comfort.
"UltraTech is our top large-cap pick, followed by ACC. JK Cement is our top mid-cap pick," said the brokerage.
The government has set up a task force to boost investments in infrastructure projects which will likely boost for cement demand.
However, analysts say it is too early to predict.
"The government's attempt to boost infrastructure has never come out positively for cement sector," said Sameer Kalra, Founder, Target Investing. "I see more negative for cement companies as on the ground, infra projects have stagnated and housing completions are behind," he added.
Recently, rating agency ICRA said domestic cement demand is expected to decline to around 7 percent in FY20. Subsequently, CRISIL also said the cement demand growth will decline to 5-5.5 percent in FY20 against 12 percent in FY19.
Price hike and low fuel cost are likely to cushion cement companies, but the fall in demand is a bigger challenge for them, experts opine.