Coronavirus: Hit on domestic cement demand likely to be transient
According to the domestic brokerage firm, novel coronavirus or Covid-19 led restrictions would dent cement demand from March 2020 onwards. However, it is expected to recover once normalcy returns.
"Historically, Indian cement demand has seen a weak correlation with global demand but a strong correlation with the domestic economy. Even as the restrictions have caused a dent, limited impact of Covid-19 in rural areas would partially cushion the near-term impact on domestic demand," it said in a report.
The agency expects a 3-7 per cent year-on-year increase in demand in FY2021/22E as against 5-6 per cent earlier.
"We see the Indian cement sector better-placed than most in the current situation with drivers linked mainly to the domestic economy. Hit on domestic demand, if any, due to Covid-19, should be transient. Also, cost benefits from subdued commodity prices should offset any pricing-led pressure on margins," it said.
Cement sector is a direct play on the Indian economy with housing and infrastructure forming 85 per cent of the total demand.
"Further, the housing demand is dominated by rural housing, which is underpinned by government subsidy and agricultural income. Being a bulky commodity, the sector has negligible trade (both import and export) and largely a local play with a cement bag having an average lead distance of 300 km," it said.
The agency further said that cement forms 5-7 per cent of total cost of construction and demand is largely inelastic to prices.
"Prices, with a strong regional factor, are driven by discipline among regional players, market concentration and partially by regional demand-supply dynamics. Our channel checks with dealers suggest that all-India cement prices moderated by one per cent to Rs 349 per bag in March 2020 after a 6 per cent increase in January-February 2020," it said. PSK ANSANS