Cement sales remained lacklustre in August as hopes of revival in demand from the realty and infrastructure sectors with the monsoon entering its end stage were belied. Left with little scope to pass on the increase in raw material cost to end users, companies had to tighten their production to match the fall in demand.

“The recent hike in the lending rate by most banks had forced many realtors to postpone new projects. On the other hand, home buyers have also turned cautious as there is an uncertainty in the rate hike cycle with inflation well above the RBI's comfort level,” said an analyst.

The consistent fall in cement demand in the last six months was well reflected in the GDP numbers — in the first quarter of this fiscal, the construction sector grew just 1.2 per cent against 7.7 per cent in the same period last year. Cement demand is closely linked to GDP performance.

“Given the high interest rate regime and the slowdown in the global economy, the GDP growth rate might not pick up anytime soon. Corporate investments have also slowed while the fiscal deficit situation is not inspiring any confidence,” said Mr Amar Ambani, Head of Research, IIFL.

Rural markets

A bountiful monsoon has turned all attention to the rural market for cement companies. The agriculture sector, the mainstay of the rural economy, has been one of the star performers in the overall GDP growth in the first quarter.

Though the rising input costs and the supply glut are major concerns, much of the trouble can be sorted out if the rural demand picks up. But the slowdown in infrastructure spending by the Government remains a cause of concern, said a cement company official.

Cost of power and fuel, a major input for cement, is set to increase by about 18 per cent this fiscal, given the soaring coal prices, said a Crisil Research report. In addition, an increase in effective excise duty rates will lower cement manufacturers' net price realisations by 2-4 per cent.

The magnitude of the demand-supply imbalance and cost escalation will halve the cement industry profit margins to about 10 per cent by FY13 — the lowest level in the past 10 years, said Mr Prasad Koparkar, Head, Industry Research, Crisil Research.

Related Topics