Nov 13, 2000|
Cement: Bottoming out?
The current financial year so far has been one of disappointment for the cement sector. After having posted a 15% rise in dispatches in FY00, growth in the current year has been a disappointing 5%. The drought, and subsequently the floods, is largely to blame for this. But, there is a possibility that the worst may be over for the sector.
Let’s step back a bit and look at the factors driving interest in the cement sector. First, consider the supply side factors. In FY00, the effective domestic capacity stood at 104 million tonnes. The sector produced 94 million tonnes (capacity utilization of 90%), most of which was consumed (92 million tonnes). Capacity additions over the next few years are likely to slow down dramatically, with only 12 million tonnes of capacity being added over the next three years.
On the demand front, there is little doubt that the potential is huge. This is borne out by the low per capita consumption figure of 90 kgs (global average of 250 kgs). There is a tremendous demand for housing, roads and other infrastructure facilities. Already, construction activity has been rejuvenated after the government passed on some tax benefits to those investing in a house. Further, work on the national highway corridor is likely to pick up pace, stimulating demand for cement. With a pick up in investment in other infrastructure facilities, demand would receive a further boost. The average demand growth is anticipated to remain in the vicinity of 8% over the next few years.
Therefore, what we have is a situation where there is a slowdown in supply even as demand continues to rise i.e. better pricing power. However, so far the ‘pricing power’ has eluded the cement sector. This is largely due to the fragmentation in the industry, which has over 50 players. Also the drought and subsequently the floods earlier this year, led to a sharp drop in demand, as construction activity in parts of India came to a stand still.
Things may however be finally looking up for the sector. On the supply side, consolidation is gaining pace. This is expected to limit the intensity of competition, and result in better pricing power. On the demand side, growth finally seems to be filtering in, with dispatches in October growing nearly 15% YoY. If growth figures were to sustain for another two to three months, it would be safe to assume that the sector is back on its high growth trajectory.
To make a near term call on cement stocks in the near term is a dangerous proposition. To take an example, earlier this year, the boom in demand for cement witnessed an abrupt halt after the monsoon turned out to be weaker than anticipated. Subsequently, the floods in parts of India further aggravated the demand scenario resulting in a sharp drop in cement prices.
However, over the long term, prospects for the sector are very promising. Rising demand, slowdown in capacity additions and consolidation all indicate that the cement sector does present an investment opportunity.
More Views on News
Aug 11, 2017
UltraTech Cement completed the acquisition of cement plants of Jaiprakash Associates Limited (JAL) and Jaypee Cement Corporation Limited (JCCL) during the quarter ended June 2017.
Aug 11, 2017
While topline witnessed growth on the back of higher cement sale volumes, a 50.5% YoY fall in other income weighed on Ambuja's bottomline during the quarter ending June 2017.
Jul 20, 2017
Expanded capacity helped ACC strengthen its market presence in eastern region during the quarter ended June 2017.
May 18, 2017
Cement demand was weak because of subdued housing demand, volatile cement prices, and rising fuel costs.
May 8, 2017
Stock price jumps up on Ambuja-ACC merger talks...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407