Coronavirus: Hit on domestic cement demand likely to be transient, says Kotak Institutional Equities
Even though the ongoing temporary shutdown in the wake of Covid-19 has impacted construction activities across the country resulting in a decline in cement uptake, the hit on domestic demand is transient, says Kotak Institutional Equities
Mumbai: Even though the ongoing temporary shutdown in the wake of COVID-19 has impacted construction activities across the country resulting in a decline in cement uptake, the hit on domestic demand is transient, says Kotak Institutional Equities.
"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 percent year-on-year increase in demand in FY2021/22E as against 5-6 percent 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.
The cement sector is a direct play on the Indian economy with housing and infrastructure forming 85 percent 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 percent 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 percent to Rs 349 per bag in March 2020 after a 6 percent increase in January-February 2020," it said.
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