Demand for cement likely to slow down

This sudden and substantial jump in incremental demand is expected to normalise as we expect demand slowdown post elections in 2024

Factors to Halt Demand

• Slowdown in construction activities in 4QFY24

• Rainfall from SW monsoon this year is 10% below

• Deficient rains likely to impact rural demand

• Govt capex may be diverted to relief package or welfare schemes

New Delhi: Deficient rains this year and upcoming general elections is likely to result in demand slowdown for the cement industry, Centrum Broking said in a note.

Operating costs have started inching up from its lows and supply intensity is picking up pace. While we believe that lower inventory costs of fuel and resilient pricing is likely to keep earnings in good stead in 2QFY24, we believe that consensus EBITDA estimates for FY25 face risk of downward revision and current valuations are factoring in growth adequately.

“We have not changed our estimates for FY24/FY25 at the moment, however, given the recent uptick in stocks, we have downgraded our rating on four stocks”, the report said.

Demand momentum post Covid has been relatively strong in the country with consecutive three years of good growth starting from FY22.

“However, we believe that this demand momentum is likely to halt given the expected slowdown in construction activities in 4QFY24 before elections due to code of conduct and deficient rains is likely to impact rural demand negatively”, the report said.

Rainfall from SW monsoon this year is 10 per cent below its long period average till first week of September. While there is still some more time to make up for the deficiency in this month, El Nino effect is likely to keep rainfall below average impacting rabi crops sowing.

“We also expect some portions of the governments capex to be diverted to relief package or welfare schemes for farmers in case of continuation of deficient rains this year. We are currently building in 5 per cent YoY growth in cement demand in FY25,” the report said.

Supply intensity picking up pace in cement sector. Given the better demand momentum in recent years and improved cash flows of the sector, ambitions to garner more market share have increased for multiple companies. As a result, many companies have announced grandiose plans for capacity addition, which we believe will result in addition of 310-340mn mt of capacity over next 6 years. We are building in incremental supply of 130mn mt against incremental demand of 86mn mt over FY23-26E.

“We believe that this sharp jump in cumulative demand over 3 years from previous average of 40mn mt over last 10 years to more than 100mn mt is a result of pent-up demand post Covid, increased government expenditure before general elections and recovery in housing markets. This sudden and substantial jump in incremental demand is expected to normalise as we expect demand slowdown post elections in 2024,” the report said.