Demand Is Very Good In The Cement Sector, With 7-8% Growth Expected In FY25 : Shree Cement

Summary

In this insightful discussion, Mr. Rhythm Desai and Mr. Bongo share their perspectives on the current trends in the cement industry. They touch on strong demand growth in housing, government infrastructure, and regional pricing variations, highlighting a 7-8% expected growth for the year. Mr. Bongo also discusses the impact of stock market trends on real estate and the ongoing consolidation in the cement sector. Despite market fluctuations, cement remains a key industry with positive momentum, driven by infrastructure projects and housing demand. Mr. Bongo explains their cautious approach to acquisitions and the expected future consolidation.

Takeaways

• 😀 Demand for cement is strong, with a projected growth of 7-8% for both the calendar and financial years.
• 😀 There is a housing shortage, with housing companies able to sell all their material, leading to reduced stock levels.
• 😀 Government infrastructure spending, which was weak last year, has picked up significantly since January and is expected to continue throughout the year.
• 😀 The North has seen price increases due to strong demand and limited new capacity, while the South faces an overhang of capacity, keeping prices lower.
• 😀 Logistic costs are higher in the West due to the transportation of material from the South, but profitability remains normal, with higher profits observed in the North.
• 😀 Demand trends for cement are expected to remain strong, with a 5-6% daily demand increase in March due to government expenditure in the final quarter of the financial year.
• 😀 The cement demand in the housing sector is also boosted by a sharp reduction in the stock of flats and residential units, requiring significant construction.
• 😀 Despite concerns about stock market weakness affecting real estate, money is still flowing into real estate as an alternative to equities, keeping the sector stable.
• 😀 Cement market consolidation is expected to continue, as the reduction in costs and logistics expenses benefits both the country and the industry as a whole.
• 😀 While consolidation will proceed, the rate of momentum seen in the last two to three years may not continue at the same pace, but it will still be higher compared to past trends.
• 😀 The cement sector is considered more insulated from global trade disruptions compared to capital goods, making it a safer investment, especially in terms of domestic demand.

Q & A

What is the current trend in cement demand according to Mr. Bongo?

Mr. Bongo highlights that cement demand is strong and expected to grow by 7-8% in both the calendar year and financial year. Housing companies are able to sell their entire inventory, and government infrastructure spending has been increasing since January, with expectations for this to continue throughout the year.

Why is the cement demand stronger in the North compared to other regions?

In the North, cement demand is outpacing supply due to limited capacity expansion, even with full production from all companies. This demand-supply imbalance leads to a natural rise in cement prices in the North.

What is the reason for weaker cement pricing in the South compared to the North?

The South still faces an oversupply of cement capacity, which puts a cap on price increases. Additionally, logistics costs drive higher prices in the West, where materials are transported from the South.

How is the government's infrastructure expenditure impacting cement demand?

Government infrastructure spending has significantly increased since January and is expected to remain strong through the year. March, in particular, sees a peak in demand due to the government spending its remaining budget, leading to a 5-6% increase in cement demand on a daily basis.

What are the key drivers of cement demand, as mentioned by Mr. Bongo?

Cement demand is primarily driven by housing, which accounts for about 60% of the demand. Additionally, government infrastructure projects are gaining momentum, further supporting cement demand.

Has the stock market weakness affected real estate demand, according to Mr. Bongo?

Mr. Bongo states that stock market fluctuations are short-term and don't have a lasting impact on real estate demand. Money flow into real estate continues as people look for stable investment options, especially when equity markets are volatile.

What does Mr. Bongo think about the future of consolidation in the cement industry?

Mr. Bongo believes that cement industry consolidation will continue in the next few years, as it helps reduce overall costs, including logistics and production costs. This will be beneficial for the industry and the country.

Why has Mr. Bongo's company been absent from inorganic growth in the cement sector?

Mr. Bongo explains that his company prefers a calculated growth strategy and is not chasing impulsive acquisitions. They focus on new units with a return on sales of about 25%, but with a more modest return on capital employed of 7-8%. They believe in long-term growth rather than immediate, high-risk investments.

Where does cement fit in the industrial growth theme, according to Rhythm?

Rhythm considers cement to be a strong player in the industrial growth theme, placing it higher than other sectors like large capital goods. Cement is less exposed to global trade disruptions, unlike capital goods, and is influenced by multiple sectors like private and government capex, as well as residential and office space demand.

What role does consolidation play in the cement market's future, according to Mr. Bongo?

Consolidation is seen as a positive trend in the cement market, as it helps reduce costs and improve efficiency across the industry. Though the pace of consolidation may slow down compared to the past few years, it will continue at a higher rate than before.