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Economy-facing sectors like cement continue to report good numbers as ACC and Ultratech Cement see a positive volume surprise this quarter.

 

Is the impact of demonetisation fading away and how are prices poised to move over the next few quarters? In an interview to CNBC-TV18, Sanjay Ladiwala, Chairman of the Cement Stockists & Dealers Association of Bombay and Rakesh Arora, Managing Partner of Go India Advisors shared their views and readings of the sector.

 

"The major factor is the rural demand which constitutes nearly 38-40 percent. Demand in rural segment is steady, which is why we ar seeing positive sign in the growth of figures", Ladiwala said.

Latha: We get these core sector numbers from the government, the last number that we got was for February if I am not mistaken and it was a contraction of 15 percent, January was a contraction of 13 percent. So was December but where are these growth numbers coming for ACC and Ultratech?

 

Ladiwala: Let me explain that the period for which these figures are taken are very small. It is a very short period. So there are big aberrations here because the methodology that is being used to collect those figures are quite not in place. So you cannot completely depend only on those figures. You have to collate those figures from various sources including companies put them together then you will get a basic general idea as to where the figures are going. Going only by one is not correct.

 

The other thing I have always been saying is a month or two months, month-on-month figures, there are bound to be lot of aberrations because cement is affected by logistics, by cyclical variations, by regional movements, many factors. So it is too short a period, if you want to ascertain any trend in cement, minimum good period has to be six months at least a quarter. We know that it is going to be erroneous.

 

Latha: Therefore which numbers would you rely, would you say overall the economy is still contracting in its cement consumption or like ACC and UltraTech Cement, it is growing albeit slowly?

 

Ladiwala: It is growing; let us know the fact that it is growing. There are some segments like basically the real estate sector which is not growing, which is not only stagnant, in some cases, in some places, it is also negative. However, having said that, that sector is a very small sector compared to the entire consumption. The total real estate sector consumes only 18-20 percent of the cement production. Now, even if that decelerates by say 10 percent, it is still only 1.8 percent of the total consumption. So, it really does not affect the total consumption.

 

The major factor is the rural demand which constitutes nearly 38-40 percent. Now that depends on the monsoon and if the monsoon is average, good, or deficit, that will show effect majorly the rural consumption. That is followed by infrastructure which is growing by leaps and bounds now. So, what is actually taking up the slack of the dearth in the growth of demand in the real sector is in infrastructure which is growing while rural is steady which is why we are seeing a positive sign in the growth of figures.

 

Anuj: I don’t know when was the last time I saw ACC rally like that, like 8-9 percent intraday. What are your thoughts on what you heard from both ACC and UltraTech, of course there was the low base effect as well for ACC, but do you think we can establish a bit of a trend here?

 

Arora: First of all I would like to mention that the street was caught off guard because of the incomplete data which was provided by the government under the eight core industries data. This data is normally provided by the producers themselves, but there was a change in the cess which is one of the entries in that form which became zero and the form was not really accepting the data until and unless you put some positive number there. So, a lot of the companies put in Rs 1 to put in the data, some did not. So, that is why the data was incomplete and it was showing large decline in volume which was not there.

 

Now, having said that, I think the question Latha was raising about impact of demonetisation, obviously there was a sharp impact in November, December, and January and things started to move up from February 15. There was a big catch up demand which came in from February 15 to almost still continuing in April and that is what has really caught the analysts by surprise. So, the impact in the quarterly numbers, people were expecting -2, -3 for these companies, they reported +4, +5. I think the surprise will be even further there in April and May.

 

Sonia: The criticism to the point that there is higher demand now is that a lot of the volume growth is being boosted because of price cuts taken across the region and hence we are seeing at least some pedestrian volume growth in this quarter. Is that true, are we seeing a lot of price cuts and do you think that could be something that could take place even over the next couple of months?

 

Arora: I don’t think price cuts had anything to do with this kind of decline. It was purely demonetisation and we have seen a big pullback. So, March according to me was at least 10 percent plus and April is also heading towards 10 percent plus kind of demand growth.

 

Now, cement prices have been jacked up quite significantly by the players which is acting like a dampener to this volume growth. So, to say that there was a catch up demand -- and maybe now we will go back to the normal trend which is around 6-7 percent growth for the calendar year.

 

Latha: You spoke about leaps and bounds in infrastructure, we have not heard that word in quite a long time. Where is this leaps and bounds, is it state led infrastructure, irrigation, what are we missing?

 

Ladiwala: Leaps and bounds is relative because infrastructure was stagnating for a long period. It was supposed to have picked up much earlier, there have been delays, but now we are seeing a lot of projects coming on-stream and actually resulting into cement consumption.

 

Irrigation, yes, is been one of them, power sector is the other one, and roads are a lot. So, these are the three sectors which are really moving forward and each project is huge. So, the consumption is really huge in these projects. You will see for example so many metro projects going on in Mumbai itself, there are proposals for coastal roads, trans-harbor links, all those are going to add to the demand.

 

Latha: What are your numbers for cement growth in March and in April and if you can split it between rural and infrastructure?

 

Ladiwala: Very frankly like I said, if I quote any numbers for a month, it is going to be erroneous because the system of collection of data is very bad and therefore unless you have at least a quarter minimum, preferably a six month period – February, March, and April has been plus by about 8 percent and that considering we had seen a negative in the previous quarter has evened out the deficit.

 

Anuj: I wanted your thoughts on couple of these broader market stocks which have seen a huge rally, Shree Cement of course we all know has been a standout performer but India Cement, the kind of massive move that we have seen, valuation wise now and fundamental wise, how is your pecking order looking now?

Source: Moneycontrol.com