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(Bloomberg) -- Ambuja Cements Ltd., a unit of LafargeHolcim Ltd., says it will take until June for demand to rebound after being dented by Prime Minister Narendra Modi’s surprise cash ban.
Industry-wide output in November increased 0.5 percent from year earlier, while production in the April-November period rose 4.3 percent, government data show. Demand will remain under pressure for two quarters, Managing Director and Chief Executive Officer Ajay Kapur said by phone on Wednesday. Modi in November junked 86 percent of the cash in circulation in a clampdown on unaccounted wealth and tax evaders.
The recall of high-value currency notes rattled the cement industry where as much as 60 percent of the business is done in cash, Kapur said. In a bid to push sales, the unit of the world’s largest cement producer encouraged its 42,000 distributors and contractors to open business accounts with banks, and bought more than 5,000 point-of-sales machines for its retail outlets. Ambuja is now relying on the government’s push on digital payments and low-cost homes, alongside the recent cut in interest rates, to help restore demand, he said.
“The industry will see improvements in the near future as the government has taken steps to improve market condition," Kapur said. Construction activity, especially in rural and semi-urban areas, are facing challenges due to heavy reliance on cash, he said.
Ambuja’s shares have dropped 14 percent since Modi’s Nov. 8 announcement. Larger rival UltraTech Cement Ltd. has lost 15 percent, almost five times as much as the losses in the NSE Nifty 50 Index in the same period.
"Cement demand is expected to drop 0.5 percent in the financial year 2016-17 against our earlier estimate for a 5.5 percent growth,” Emkay Global Financial Services analyst Sanjeev Kumar Singh wrote in a report dated Dec. 28. Brokerage Nirmal Bang Equities Pvt. expects demand to decline 1.3 percent in the year through March.
"We expect demand disruption to push down cement demand recovery by at least a year and hence capacity utilization will be lower for a longer period than what was expected earlier," Mangesh Bhadang, an analyst at Nirmal Bang, said in a report last month.
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Data released since Modi’s move add to evidence of a sharp slowdown in Asia’s third-largest economy. The Nikkei India Services Purchasing Managers’ Index was at 46.8 in December, a report showed Wednesday, little changed from 46.7 a month. A number below 50 indicates a contraction.
Ambuja is relying on Modi’s "Housing for all" program that started in June 2015 to stimulate demand. The government aims to construct more than 20 million houses across the country by 2022. On Dec. 31, Modi also announced rebates and interest waiver for home loans under the program.
The housing program can generate an additional demand of 120-150 million tons over next six years, compared with the current annual offtake of 260-270 million tons, Kapur said.
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