Cement Companies To Begin 2017 On Shaky Ground

The cash crunch will take its toll on cement companies’ volumes and profitability in 2017. The government’s demonetisation drive has hurt the real estate sector, and with 65 percent of the country’s cement demand coming from that sector, the second-rung impact will be felt by cement companies as well.

In the short term, earnings will be at risk, as demand is expected to remain muted for the next few quarters, according to brokerages including Ambit Capital and HDFC Securities. In the long term though, the government’s emphasis on infrastructure spending and a revival in rural demand, on the back of good monsoons, is expected to boost demand.

Cement prices in the October to December quarter returned to the level last seen in the same quarter last year – Rs 322 for a 50 kilogram bag – after declining for two consecutive months in November and December.

A survey conducted by Kotak Securities in 25 cities shows that demand may have fallen by as much as 70 percent in certain regions.

Kotak Securities has lowered its volume estimate by 1-8 percent for the financial year 2016-17, and cut its earnings estimate in the range of 18-45 percent for the top four cement companies in terms of market capitalisation. The brokerage firm attributes this cut to the ongoing cash crunch following the demonetisation.

The pain is however, expected to ease in the next financial year, as analysts forecast a recovery in demand in the second half of the year. To be sure, there is a downside risk if the current cash situation does not improve over the next two quarters, and realisations, which have shown some resilience, give way on account of weakness in demand.

In terms of the geographical impact, the cash crunch is expected to hit northern and central India the most, according to a recent report by Ambit Capital.

Among individual companies, Shree Cement Ltd. could be the worst hit given its high exposure to north India. According to Kotak Securities, this could make it the only cement stock with a negative price-to-earnings ratio till the end of this financial year, amongst the top four cement companies.

Another concern hovering over the industry is the trend reversal in petcoke prices, a key raw material which aided earnings over the last two to three quarters. Most of these gains will be reversed in the coming quarters owing to the spike in petcoke prices, which are back at November 2014 levels.

Things are likely to flip at the most inopportune time for cement companies, as spiking energy costs begin to sting at around the same time when volumes are likely to be low.