Short-term demand impact due to the Kerala floods is expected to keep cement prices in south India as lower levels.
Cement demand in Kerala, which is estimated to contribute around 13% to overall sales volumes in southern India, would get hit in the near term due to the Kerala floods. Consequently, prices in this region would remain muted. A recent dealer channel check by domestic broking house Kotak Institutional Equities Ltd showed that prices of the building material in south India declined to ₹ 345/bag in August from ₹ 347/bag in July. One cement bag weighs 50kg.
"Prices were flat in states of Tamil Nadu and Karnataka while they declined in Kerala. We note that companies in the south reported weak demand from Kerala due to heavy rains and floods," said the Kotak report.
Listed companies such as Ramco Cements Ltd, India Cements Ltd and JK Cement Ltd having exposure to Kerala could see a near-term slowdown in demand.
According to analysts, Ramco Cements derives around 20% its revenue from Kerala, while India Cements and JK Cement get around 13% and 5% revenue, respectively, from the state.
That said, reconstruction efforts later could compensate for this demand loss to a certain extent, but given the overcapacity in the region, cement companies may not be able to take price hikes.
On an average, cement prices across the country fell by ₹ 6/bag in August so far compared to July, to ₹ 329/bag. It should be noted that this is a seasonally weak quarter for cement companies and subdued demand leading to weakness in prices is on anticipated lines.
In any case, overall cement prices are unlikely to see a revival unless demand recovers sharply.
Meanwhile, there is no respite for cement makers as far as input cost pressures are concerned. Surging prices of petroleum coke in a challenging pricing environment would continue to restrict operating margin growth of cement companies in the September quarter.
In short, while south India-based cement companies may see some increase in demand aided by reconstruction activities, headwinds on the cost front remain for the entire industry, thus limiting drastic improvement in margins and earnings.