Cement dealers staring at 30% demand contraction

Source : IANS
Author : IANS
Last Updated: Mon, May 18th, 2020, 16:33:22hrs
Cement dealers staring at 30% demand contraction

New Delhi: Cement dealers across the country expect a significant slackening in sales, elongated credit period to retailers, and higher working capital needs in the wake of the Covid-19 pandemic this fiscal, a survey on the sector has said.

The CRISIL Research survey said that whopping 93 per cent of the respondents expected volumes to shrink 10-30 per cent in fiscal 2021 in the base case scenario, i.e, the lockdown easing in May. Extension beyond this can worsen these figures.

Also, 70-80 per cent dealers felt individual home builders would delay new construction due to gloomy business outlook, fear of income loss, labour shortage, and uncertainty with respect to resumption of normalcy.

The survey was conducted with 100+ dealers spread across Tier 1 and 2 centres in 13 states to glean insights on the pandemic's impact. Trade channels account for 60 per cent of annual cement sales.

According to survey, over 60 per cent of dealers are holding low inventories (2-4 days), but spoilage concerns persist. Dealers are hopeful of liquidating inventory by offering discounts as soon as the lockdown eases, to contain spoilage and get volumes going.

On the other side, payment delays from retailers appear inevitable considering these players are small and fragmented, and most likely to delay payments amid liquidity crunch, gloomy demand outlook, and cement spoilage concerns. That, in turn, would stretch the receivables cycle and negatively impact cash flows of the dealers, as much as 95 per cent of whom offer credit.

Rahul Prithiani, Director, CRISIL Research, "The cycle of recovery of retailer dues is expected to extend by 4-6 weeks over and above the usual four weeks. This will potentially increase the working capital requirement of dealers by 12-17 per cent, even as they reduce credit exposure, infuse capital, and curb non-essential expenditure."

The elongated working capital cycle could last at least a couple of quarters, and the risk of retailers defaulting on payment dues would aggravate the financial pain. However, the collateral-free MSME loans announced by the government on Wednesday will come as a big relief, since it will help cement dealers access working capital debt.

More than 90 per cent of the dealers surveyed are hopeful of manufacturers' support in terms of better margins/incentives, or liquidity support to weather the hard times.

But chances of a swift revival post lockdown remain bleak, with 58 per cent of the respondents believing it will take over three weeks for operations to normalise.

Guranchal Singh, Associate Director, CRISIL Research, "An intermittent rise in daily wages, freight cost, and construction material prices will deter restart of construction activity. Return of labour, freight disruption and dwindling consumer confidence will weigh on resumption of normalcy in the near term."

Improvement is envisaged in the second half as demand picks up and receivable days gradually decline. But even here, recovery in urban areas may take longer due to extended lockdown, slowdown in real estate construction, and higher dependence on migrant workforce.

A few dealers, though, are optimistic that the labourers, who have not been able to earn wages for nearly two months, would return quickly post-kharif sowing to capitalise on pent-up demand and halted construction activity.