“Cement sector is a good proxy to play an impending upcycle in the economy and revival in the real estate sector,” says Patwardhan. He expects select cement stocks to continue to outperform in the medium to long term.
His positive view is based on the expected upturn in the cement cycle led by improving demand supply balance, better pricing environment with increasing industry consolidation and rising utilization levels. The veteran fund manager believes cement demand is expected to outpace supply by growing at CAGR of 7% over FY20-23e period while capacity additions are expected to grow at CAGR 4% over the same period.
The fund house believes the government’s focus on housing (particularly affordable housing), infrastructure push and strong revival in the overall real estate sector should augur well for strong growth in cement demand going forward. Difficulty and high cost of adding new cement capacity further improves the attractiveness of existing cement businesses.
The fund manager points out that almost after a decade we are seeing signs of revival in the real estate sector which is the biggest driver of cement demand and is estimated to account for about 2/3rd of the total demand. Housing activity has been robust in rural and semi urban areas driven by higher disposable incomes, rising aspirations and government sponsored schemes on affordable housing. Lower home loan rates, improving affordability and supportive state & central government policies have given a fillip to housing demand in Metros/ Cities as well. Building of infrastructures such as roads, ports, bridges, dams/irrigation projects, urban transportation (metros), airports etc. is the other big demand driver for cement. As the reform measures announced by the government start showing an impact on execution of existing and new infrastructure projects; cement demand will likely get another strong boost going ahead.
Patwardhan believes that the companies in the sector will be able to mitigate margin pressures coming from rising raw material costs and freight costs by higher demand growth, their ability to pass on cost increases to the customers aided by better pricing discipline and by undertaking cost efficiency programs. The cost of setting up new green-field cement capacity has increased significantly with land acquisition issues and access to raw material resources becoming difficult adding to the attractiveness of existing cement businesses.
