Cement Industry contracts first time in 12 years

Brief: Cement Industry contracts first time in 12 years; Poor performance of construction sector has a major impact; SMERA expects profit margin of the industry to be negative in Q4 and remain bearish well into FY18

Impact: Negative

Indian cement industry continues its negative growth, by recording a contraction of (-) 6.8% in March 2017. Until recently, Cement was one of the best performing industries among the core sectors – however, Q3 onwards, as the impact of demonetization unfolded, things changed for the worse. Ongoing consolidations have limited scope for capacity augmentations and capacities already created are severely underutilized in some cases. Post demonetization, this sector has contracted by nearly (-) 9%. Overall, as a result of the poor performance in the last two quarters, the annual growth of the industry has contracted by (-) 1.3% in FY17 as against an expansion of 5% in FY16. For the record, the industry has contracted for the first time in the past 12 years.

On the other hand, consumption has expanded by just 1.2% in FY17 (Apr-Jan) as against 3.3% during the said period in the previous year. The construction sector that consumes nearly 93% of overall production of the cement industry has been severely impacted by demonetization and this has dampened performance. Moreover, the real estate companies are reeling under the implementation of the Real Estate Regulating Act (RERA), which is announced in last budget. With the implementation of RERA, freedom of real estate companies’ on project completion will be curbed and overall increased obligations may have a debilitating effect on several small and median sized companies.

With the continuation of a mild demand, the price of cement has also dropped in various regions in FY17. As a result, profit margins of the industry has dropped from 7% in Q1 FY17 to 0.9% in Q3, FY17. SMERA expects that profit margins would be negative in Q4 and may continue their bearish trend well into FY18.

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