The July-September quarter was the worst for the cement industry in the recent down cycle. Sales were unimpressive. Profits fell sharply. Every variable played spoil-sport.
The extended monsoons dampened demand as construction activity remained poor. Despatches were further curtailed by unavailability of wagons and shortage of labour. Overhang of excess capacity reduced realizations. Correspondingly, an upsurge in raw material prices hindered profitability.
The October-December quarter is expected to bring some relief. The month of October witnessed a sharp rebound in production and despatches. This is a normal trend after a dull monsoon season. Cement realizations also improved significantly. Fear of price hikes led dealers to build-up their inventory.
However, construction activity remained subdued. The effects of this spilled over in November. The month saw both despatches falling and cement prices softening. This was mainly because demand for Government and real estate projects did not pick up. The festive season created shortage of labour.
And the unseasonal rains made matters only worse. Some improvement is expected in December on the logistical front. The demand may improve marginally. But it may take a few quarters before the supply overhang goes.
Cement consumption is closely tied to the overall growth and well-being of the macro-economy. Indiaís robust GDP growth translates well for the commodity. But a robust GDP growth rate cannot sustain without the appropriate infrastructure in place.
Hence, the government continues to emphasize the same. It has already spelled out plans to double the infrastructure spending to $1 trillion in the 12th five year plan starting FY12. This means demand for cement will remain strong.
Also, India lags far behind the world average in terms of per capita cement consumption. It is 7 times lower than that of China. This underlines the tremendous scope for growth in the long term. So, the long term remains intact for the sector. However, there may be some challenges in the short to medium term.
And therein may hide an opportunity for a seeker of value in cement stocks. As of now, sector stocks appear to be fairly if not richly valued. But a couple of quarters of pain and stock prices could come under pressure. Taking into account the marketís tendency to overshoot in both directions, a watchful investor may just be able to scoop up good value from a cement stock from a long term perspective. In other words, a correction that is greater than what is warranted could actually be a boon in disguise.
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