Home Spotlight Is construction sector crawling back to normalcy?

Is construction sector crawling back to normalcy?

Now the common question that is doing rounds in everyone’s mind is “Is the economy back to normal?”. However, answer to this simple question is difficult to come by as the economic environment has become too volatile, part of which is beyond our control. Construction being one of the key sectors of the economy – due to its huge contribution to GDP and also job creation ability – its recovery is keenly followed by many in the country. Here we make an attempt gauge the ground reality by analysing the volume growth of some of the leading players in the building material industry during the second quarter.

Heart warming performance by Asian Paints

Asian Paints’ second quarter results were heart warming not only for the company’s shareholders but also for those who closely watch economy and its indicators. Asian Paints is a market leader in decorative paints’ segment which is a discretionary spending product and volume growth during the quarter shows that people have started spending over and above their bare basic necessities. The Decorative business of the company registered 11% y/y volume growth and 6% y/y value growth, with demand picking up across regions and the paint segments. However, the management attributes the demand recovery seen in Q2 FY21 to the upcoming festive season, though the situation continues to remain uncertain. Management’s view is that Tier 2-4 towns are entirely back to earlier levels whilst metros and Tier 1 cities are still just about 70% recovered so far. The strength in volumes was, however, still driven by lower-end products in parts and the management expects the trend to continue for some more time.

Kajaria’s performance too is re-assuring

Kajaria Ceramics, largest ceramic tiles maker in the country, too surprised the market with its second quarter numbers. Kajaria reported tile volume of 19.8 MSM for the quarter which is almost the same as was in the same quarter in the previous year, indicating that the company has fully recovered its operations to pre-Covid level. However, growth has come from Tier II, III and IV cities while metro cities are still lagging behind in demand growth. Further, the company was also helped by market share gain from the troubled small players in the unorganised sector who found it difficult to operate during post lockdown period. Pent up demand and channel re-stocking also helped to push up the volume. Importantly, the company is optimistic about its near term prospects as it expects volume level almost similar to last year’s in the third quarter and 10% growth in the last quarter of the financial year. Further, the company expects 15% volume CAGR over the next few years.

Capital goods sector still shaky

However, capital goods sector has not yet come out of the woods completely and its demand has not been restored to pre-covid level as the sector continues to struggle to sort out some of its problems. According to some project managers, the construction sector still faces execution challenges at project sites owing to strict safety standards required to be followed and extended monsoon and postponement of project execution by clients. Labour unavailability, deferment of fresh orders by public & private sector and elongation of working capital cycle due to delayed payments from customers are some of the other problems the sector is trying to resolve.

Cement sector redeems itself

Meanwhile, the second quarter performance of Ultratech Cements, the largest cement manufacturer in the country, indicates revival of construction sector. Ultratech posted strong volume growth of 19% YoY to 20.1 MT on the back of strong rural and infrastructure demand. On cement demand front retail, rural and resumption of infrastructure projects in North, Central, Gujarat and East are expected to continue on growth path while Maharashtra and Southern markets are witnessing recovery in demand post resumption of economic activities in these regions. HeidelbergCement registered just 2% decline in volumes vis-à-vis last year’s second quarter volume. Ambuja Cements, another leading player in the industry, also posted good volume growth during the second quarter leading one to believe that growth in the industry is widespread which in turn indicates increased construction activities.

The Cement industry, in general, witnessed positive demands during second quarter in East, Central, Gujarat and North led by demand from rural housing demand and infrastructure segment while Maharashtra and Southern regions are at recovery stage and are witnessing revival in demand led by opening up of markets and positive demand from Infrastructure segment.

General economic indicators too are positive

Apart from the performance of leading players of building materials industry, some of the general economic indicators too are encouraging and point towards slow but sure recovery of the economy in general. For example, energy consumption for September grew by 3.4% y/y basis, vs. -2.1% in August. Further, daily energy consumption from 13th-19th October remained in the positive territory. As on 18th October, 67% of E-way bills were generated compared to October 2019 and 61% compared to September 2020. E-way bills generation in September was well above the pre-Covid generations and the highest since April 2019. Daily railway freight tonnage from 14th-20th October grew by an average 7% y/y despite high base vs. 21% in the previous week. As per CMIE data, unemployment rate registered a sharp improvement to 6.1% as on 18th October vs. 7.7% as on 11th October. Unemployment rate improved to 6.7% in September compared to 8.4% in August.

Too early to jump to conclusion

Though these indicators generate optimism some headwinds are a cause of worry. While Covid spread shows signs of abatement of late, we receive the news of second wave of Covid spread in Europe which may also happen in India in the coming months. Tension at the borders is still on with no major solution emerging. Uncertainty surrounding US election results makes the matter even more complicated. So, despite the visibility of some green shoots jumping into conclusion at this juncture seems to be foolhardy. Utmost prudence is the need of the hour.

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