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Below is the Views On Impact on Cement Consumption with possible Slowdown in Roads & Highway by Mr. Binod Modi, Sr Research Analyst Reliance Securities.
Impact on Cement Consumption with possible Slowdown in Roads & Highway
With Roads & Highways segment appears to be new victim to economic slowdown as to PMO suggesting NHAI to tone down its aggression in awarding new projects and move to BOT model. It clearly appears that government is now trying to promote private investment in roads & highway by making projects financially viable with higher viability gap funding. While its repercussion in some of some of ambitious large projects like Bharatmala is yet to be seen, it clearly appears that pace of road projects execution hereon is unlikely to exceed 32kms/day (10,800kms) seen in FY19.
While this impact would be seen with a lag effect, cement industry is certainly to be impacted as cement consumption in roads & highway has been a key demand driver for last couple of years.
As indicated by UltraTech during 3QFY16 earnings concall, two lanes of 1km concrete road project consume around 1200 tonne of cement and two lanes of 1km bitumen road project consumes around 300tonne of cement. Hence, considering all roads constructed as four lane in FY19, estimated cement consumption from roads & highway stands at 26mnT (8% of total cement consumption and ~25% of total consumption in infra segment).
Our interaction with one of cement company reveals that it is unlikely to impact them much in the near to medium term as any shortfall in roads will be fed by the likely increase in cement consumption from railways (doubling railway lines with concrete structures) and pickup in government housing programme.
We believe cement consumption to pickup meaningfully in 2HFY20 mainly to be led by favourable monsoon and pickup in government spending. We still mainly our view of demand growth of 4-5%.
We like UltraTech Cement at (11.2x FY21 EBITDA) in large cap and JK Cement (7.6x FY21 EBITDA) in mid cap space.
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