W.e.f. 4th May’20, the Ministry of Home Affairs (MHA) had extended the nationwide lockdown for a further period of two weeks based on the risk profiling of the districts into red (hotspot), green and orange zones. With majority of traditional building material volumes falling in the red zone districts (which includes large part of metros and tier-I cities of India), the Covid-19 impact on the building material sector is likely to be unprecedented particularly in H1FY21. Within the space, we expect plastic piping and adhesives categories to get relatively lesser impacted while categories like wood panel, tiles and sanitaryware are likely to witness a significant growth deceleration in these testing times. Our top picks in the space remain Astral Poly Technik and Greenlam Industries.
* Early signs of demand disruption seen in bathroom solutions and wood panel categories in particular. In the wake of Covid-19 led extended countrywide lockdown, the demand for major building material categories has taken a beating in the month of Apr’20, as anticipated. However, as we enter into the middle of lockdown 3.0, with the government identifying districts into red, orange and green zones, the movement of material in select categories has, however, started in May’20. Our checks suggest that categories like agricultural/plumbing pipes and cross laminated films (seasonally strong quarter for these categories) have seen decent opening-up of demand. However, in case of categories like bathroom solutions (tiles, sanitaryware and faucets) and wood panel (plywood, MDF and laminates), the demand remains largely impacted, as anticipated.
* Resumption of factory operations category-wise. Factory operations have majorly resumed in building material categories like plastic pipes and adhesives segments, while being resumed partially in wood panel segment. However, factories manufacturing tiles, sanitaryware and faucets are yet to resume operations citing high channel inventory and liquidity woes in the trade.
* Existing high channel inventory impacting select categories. The existing channel inventory lying at the dealer’s end is higher (30-45 days) in case of categories like tiles, sanitaryware, faucets, plywood and laminates. However, in categories like PVC/CPVC pipes, adhesives and MDF the channel inventory seems lower at 15-30 days. We, thus, expect pipes, adhesives and MDF categories to recover faster with the revival in demand.
* Cost control measures initiated. Besides rationalising their brand spends, majority of building material companies have either resorted to or are likely to announce salary cuts for their employees soon. The largely impacted bathroom solutions (tiles, sanitaryware and faucets) companies have already announced major salary cuts which are applicable for one to two quarters (till Q1/H1FY21). In case of wood panel companies, few companies have initiated some salary cuts while major decision on this is likely to be taken soon. Top plastic companies have, however, refrained from taking any salary cuts as of now.
* Export-based building material models have seen initial signs of movement. Export-based building material companies have already started exporting products based on their orders in hand. As per our checks, companies like Greenlam Industries and Greenpanel Industries in particular have already seen shipments of a few orders (booked in Q4FY20) post lockdown 2.0.
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