Published on 23/10/2019 12:52:42 PM | Source: Yes Securities Ltd

Cement Sector - Demand recovery still a while away By Yes Securities

Posted in Broking Firm Views - Sector Report| #Cement Sector #Sector Report #Yes Securities Ltd

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Demand recovery still a while away

Demand headwinds to persist in 2HFY20 Our interaction with the building materials dealers PAN India indicate,

i) Persistent slowdown in the real estate sector with no signs of material improvement for 2HFY20,

ii) Demand in West, Central & South regions has been affected by severe floods in key states like Maharashtra, Bihar, Karnataka & Kerala,

iii) Demand from affordable housing projects has also slowed down sequentially in Q2FY20,

iv) Liquidity woes due to tightened bank lending,

v) Rising working capital constraints as many small distributors & retailers are facing difficulties while running their businesses due to late payments or payment defaults,

vi) Exports remains only major growth driver for tiles & laminates products,

vii) Slowdown is now more prevalent in rural areas,

viii) Tepid domestic retail replacement demand, and

ix) Pricing remains suppressed amid excess supply & competitive pressure.

We believe multiple demand headwinds likely to persist in 2HFY20 as well & hence forecast Tiles/ Sanitary-ware/ Plywood/ Laminate/ MDF industry volume growth of ~5%/ 4%/ 4%/ 8%/ 15% respectively in FY20.


Pricing pressure to continue for ceramic products

Sustained slowdown in the real estate sector and liquidity issues in the trade have significantly hit the Morbi tile manufacturers. Hence, the price hikes initiated by Morbi players post the coal gasifier ban have also seen a partial rollback. Realizations of Glazed Vitrified Tiles (GVT)/Polished Vitrified Tiles (PVT) products are under significant pressure with more players launching newer products and designs at competitive rates. We believe pressure on realizations of branded products should continue, mainly because of higher competition from aggressive approach adopted by emerging (Tier-II) Morbi players.


Working capital, a bit stretched for some established players

Channel check suggests that the WC cycle for some established branded and emerging players has remained stretched over the past few months. For established players (Somany, HSIL, Rushil Decor, Greenply, Simpolo), WC days remain stretched because of higher inventory days while for the emerging players (Sunhearrt, RAK, Swastik, Varmora etc.) higher debtor & inventory days (some cases) have impacted the overall working capital cycle. Few regional plywood & tier-II morbi tiles players have remained aggressive in ramping up sales (both domestic and exports), which might be a key reason driving up debtor days.


Exports & shortening home renovation cycle to aid laminate industry growth

Domestic laminate players like Century Ply, Greenlam & Merino have been gradually gaining traction among foreign importers and specifiers over the last few years due to better product quality at competitive pricing. India’s home renovation cycle has reduced from 15 years a decade back to 7-8 years currently; it would further reduce to 5-6 years going ahead due to rising disposable incomes, aspiring young population & nuclear families. Besides, our channel checks indicate that the labour cost as % of total furniture cost has gone up from 40% to 50% in last 5 years, and it can further increase to 60-65% over the next 5 years. As seen with various paint companies, demand for premium to midrange products has increased significantly with labour charges accounting for a major portion of painting costs. Hence, we feel demand for branded and readymade furniture to pick up, directly leading to growth in laminate consumption.


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