Pre-poll construction work to give a boost to cement sales
A pick-up in infrastructure and construction jobs has resulted in cement sales volumes growing in strong double digits over the past few quarters and the momentum is likely to continue ahead of the Lok Sabha elections.
Typically, cement growth spikes in elections years, and experts believe that 2019 will be a strong year for construction as the elections are likely to be held in May 2019 and states, such as Andhra Pradesh and Maharashtra, too might hold elections.
Despite a potential slowdown in tendering and ordering activities, project execution is seen increasing boosting cement sales.
“The FY19 saw a trend reversal as demand is expected to grow at 9 per cent- 10 per cent, the fastest in almost a decade. Industry feedback indicates FY19 growth has primarily come from government-led infrastructure and a boost from pre-election spending (states as well as the centre). Across regions, the South and East have witnessed strong growth, while the west faces challenges. Momentum should continue and we build-in 7 per cent growth for FY20, despite a tough base,” brokerage CLSA said in a report on the cement sector on Tuesday.
Besides infrastructure growth, cement sales also got boosted by the pick-up in low-cost and affordablehousing programmes.
“Issues related to sand mining in the states of Rajasthan, Bihar, Maharashtra and Tamil Nadu are also now behind, further fortifying the demand trend,” brokerage Motilal Oswal said in a report.
According to ETs research arm, ET Intelligence, cement shares have grown 1 per cent in the past one month, as against a 0.5 per cent growth in benchmark index Sensex. During this period, J K Lakshmi Cement was the top gainer, with share prices increasing over 18 per cent. Shares of Prism Johnson, Ramco Cements, and India Cements rose 8-10 per cent.
“Profitability is expected to get better due to shrinking petcoke and diesel prices, but the impact would be small as the price drop began only at the quarters end. Cement prices have largely been steady. We expect revenue to grow 13 per cent and EBITDA 5 per cent, though profit after tax would contract 27 per cent year-on-year. We prefer some of the central and southern companies, such as Heidelberg, Birla Corp, Dalmia and Sagar,” brokerage Anand Rathi said.
The brokerage also said that it expects around 90 million tonne capacity to be added over FY19-22 and demand would clock a 7-8 per cent compounded annual growth rate, which could lead to a better pricing scenario as supply pressures eases.
As the country gets into the election mode, the order tendering by the government will slow down. But experts say the current orderbook of construction companies give visibility of strong demand for cement.
“Our team tracking the Indian infrastructure sector expects construction activities to pick up from FY20, led by a favorable operating environment and various government initiatives. We estimate the road construction rate at 33km/day in FY20, resulting in additional cement demand of around 5.75 million ton over FY 20,” Motilal Oswal said.