The domestic cement sector is likely to witness improvement in demand due to pickup in construction activities and expected favorable monsoon this fiscal, a report said. Having seen a moderate demand improvement in the third quarter of 2015-16, demand scenario continued to remain firm in the fourth quarter as well, Reliance Securities said in its report here.
The demand environment is likely to remain sound mainly supported by uptick in non-trade segment sales. "We expect project segment demand to improve further in FY17 with the pickup in construction activities especially from concrete road projects and urban infrastructure projects," the report said.
Further, expected favorable monsoon will aid rural demand in 2016-17, it added. "We foresee FY17 would be better for cement companies mainly on following counts like low base of volume growth, possible realizations recovery, pickup in construction activities and possible pickup in rural consumption to be led by favorable monsoon," Reliance Securities Research Analyst Binod Modi said.
A healthy improvement in demand scenario along with favorable cost environment is likely to have a positive bearing on fourth quarter (2015-16) performance of cement companies as they are likely to witness earnings improvement of 37 per cent on sequential basis, Reliance Securities said.
Having seen abysmal environment scenario till the third quarter, sales volume of cement companies witnessed a healthy uptick mainly led by sharp execution pickup seen in infrastructure projects across the country. Cement companies have witnessed an average volume growth of 13 per cent y-o-y mainly led by new capacity and demand improvement.
The report observed that barring few pockets in Southern and Western markets, demand environment witnessed a decent uptick in the fourth quarter. Northern and Eastern regions have witnessed healthier improvement in demand. Commenting on pricing scenario, the report said though there has been a meaningful improvement in demand, excess supply has restricted the price rise.
"Our channel check suggests that all India average cement prices are down by 7.5 per cent y-o-y and 2 per cent q-o-q on the backdrop of sharp price cut seen till December 2015 and recent price correction seen in select Western / Southern pockets," it said. Notably, Northern cement prices have witness a sharp recovery of Rs 70-80 per bag in the last two months.
However, Reliance Securities pointed out those dismal realizations are likely to remain an overhang on performance of cement companies.