My views are a bit different on the spike that we saw in Q4 in terms of growth across the country including south, which was otherwise showing negative growth through and through. This is good news, but I am not too sure if it can sustain at the same pace. What we have seen in February-March is an outlier in my view, and growth numbers are likely to taper off. If I have to compare Q4FY16 to Q4FY15, there seems to be almost 45% growth in Andhra and Telangana combined, while Tamil Nadu did not grow beyond 1.5%-1.6% and Karnataka was at a modest 8%. Overall, south had a growth of around 13.5%.
It is interesting to note that during Q4, the movement from south into the rest of India – specifically west and east – came down by almost 7%. This indicates that the south growth numbers were skewed. Possibly because of low prices in AP/TS , cement that was meant to go to the west or east was being sold in south itself. In other words sale recorded in AP /TS was partially moving to neighbouring state, unofficially. Therefore , it is not an apple-to-apple comparison.
Moreover, large portion of the sales during February-March in AP/Telangana was driven by contractors’demand. In these two states contractors were to finish their work and submit bill by the end of March, so they went on an overdrive. In addition, Lower Cement price acted as a motivation for distributors to buy more in anticipation of price hikes. There was a bit of inventory built at secondary level, coupled with a cut in inter-region movement (to Maharashtra or to east India). All of above lead to inflated demand in Q4 which I believe will taper off going forward.
For the past 5-6 years in a row, Andhra specifically has seen negative growth; this was the first year after a very long time that we have seen positive growth of 5% in Andhra and Telangana. So while Q4 growth was good, the year’s growth was 5% – which is reasonable. Going forward, this 5-8% growth in Andhra and Telangana should be sustainable. You should not expect double-digit growth that we saw in Q4, but we should definitely see a modest growth of 5-8%. Obviously, we have to really keep a close watch on what happens to the capital, the many promises that the Telengana government has made, demand triggers from the so-called Swachh Bharat Scheme, and also on the road projects.
I do not see much growth coming from Tamil Nadu and Kerala because of elections for the first 3-4 months of FY17. Until the new government settles, I do not see much activity happening. In these states, normally, the money spent before and after elections is more on social welfare and not construction. Kerala is seeing some strain because the Middle East not doing well. Karnataka will see a modest growth of 8%, mostly from south Karnataka, and because of some of the activities that the government has taken up at the rural level. Maharashtra saw 15% growth last year, and this pace should continue. This is a very important state, given its close integration to the south. Obviously, all these numbers have a bearing on how the monsoon behaves this year; things are pretty bad now and if the monsoon is below average, construction activity will definitely get majorly impacted.
This is where I have a different view from people who get very bullish on growth. My view is that growth without profit makes no sense. Earlier in south India, because of lack of growth, companies used to sell cement while maintaining their brand equity – trying to position themselves at higher price levels, and cutting distribution costs – because fighting for market share was not a viable route. However, in Q4, as growth came back, a little greed set in – which resulted in prices falling, quite substantially in Andhra and Telengana. Prices in Hyderabad in Q4 touched ~Rs 230-240 while they were as high as Rs340 a few months ago. Rs 70-80 has just gone down the drain because a few companies were trying to increase their market share. In one of the cases, a smaller player apparently got an assurance from a third party to fund its expansion plans, which made them greedy and this accelerated the pace of price war. I believe good sense will prevail in the long run, and we will start focusing on better prices again. Even if the growth comes (my guess is 5-7% or even 10% at best), demand-supply gap of around 80mn tonnes will take about five years to match. What we were doing was best – maintaining our positioning while trying to sell in the right market at the right price. We have to go back to that era instead of trying to fight for market share in a commodity space.
Prices have now improved by Rs 50/bag in markets where a sharp price correction took place. We expect another Rs 50-60 price improvement in a couple of tranches over the next few months, for it to reach its original levels.. In other markets, cement prices remain fairly stable. Just to give you an indication, I believe Bangalore is in the range of Rs 380-390, Chennai Rs 390-395, and Kerala Rs 400-410. Since we operate a little bit in the north, I think north has seen an improvement, but again in specific pockets– some pockets have gone up smartly and some pockets, not so well. Gujarat remains Rs 260-280, Rajasthan Rs 265-270, and further north it is Rs 275-285. Similarly, Orissa, which used to hover around Rs 340 a few months ago, is down to Rs 290-300. However, because of demand improving, I see price improvements happening. While it cannot be seen at the ground level yet, I expect prices in the east rising.
Basically – stuck for funding. There is no fund with most of these governments. Telengana for example– structurally, its revenue is good, but I think the priority is different and therefore the government is not able to spare enough money for projects that they had talked about. They were supposed to have done a lot of flyovers, white topping across Hyderabad,two bedroom houses for all those who are below poverty line, a little bit of irrigation projects which are only at very initial stages), and of course the Swacch Bharat and Smart City projects. While they were supposed to have funds, at least on paper, they have possibly spent them on welfare activities. In fact, the contractors tell us that even the jobs that were done are facing delayed payments. Coming to Andhra, they do not have money to implement the grand plans they have. I always say I have tremendous confidence in the chief minister, but unfortunately, he is not able to get things started. Activity will ultimately happen, question is timing ! What is happening today is only activity in terms of transaction of land – more of speculative trading. However, this will eventually lead to construction and thus cement consumption.
In a nutshell, at the ground level, nothing earth-shaking is happening – which strengthens my assumption that the demand will not grow at the pace in which it had grown in Q4. I do not see major construction happening around the capital of Andhra in near future. We were expecting a lot of activity from Telangana – in the form of roads and houses. We thought National highway projects will add to lot of cement consumption,but if you look at the list, except for two major projects that have been awarded recently, there are no other road projects in the south – anywhere – right from Andhra to Kerala. Most of the projects that have been cleared are in central and north India.
The most important contributor to demand creation is driven by middle class and from the rural areas – it accounts for almost 55% of cement demand in India in terms of individual houses, plus 15% in terms of what you call the builder segment, which adds upto 70%. In this component, we are not seeing anything great happening, because it is linked to the economy and job creation and people becoming comfortable that they can repay loans or have savings to invest. One has to really wait for those real turnaround triggers. Given the low base and lack of economic activity, I see 5-8% demand growth with reasonably fair prices in south India.
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