Having witnessed relatively strong demand during this period last year, first quarter of this financial year (and the current quarter) building material sector is posing a picture of subdued atmosphere. Mid-teens growth was taken for granted for most of these segments which has been belied this time. Leaving some lucky subsegment apart, even for hardcore optimists, high single digit growth seems to be an uphill task this year. Reasons for this poor performance are many and varied (for each subsegment).
Realty slowdown drags materials sector down
There is no doubt that building materials’ health largely depends on the health of real estate sector and unfortunately real estate sector is witnessing slowdown for the last few years with no solutions on the horizon visible. The stress can be witnessed in the form of a decline in the number of units launched which are down 65% at 1,95,000 units in CY2018 from a peak of 5,50,000 units in CY2014. Residential sector is seeing mounting unsold inventory and acute liquidity crisis, especially in last 8-9 months. For example, Anuj Puri, Managing Director, Anarock expects 70% of the developers to go out of business in the next one year as a result of the industry weak sales combined with lack of financing options. The recent liquidity crisis in the NBFC sector has added to the problems of already cash strapped developers due to the unavailability of credit at a lower cost. Some of the building materials largely dependent on real estate new launches for their survival and growth. For example, cement industry’s 20% demand is accounted for by real estate industry. No wonder cement industry registered one of the worst volume growths in the first quarter.
Ceramics players badly affected
Ongoing slowdown in real estate industry has its impact on ceramics industry which sees lesser growth in volume in the coming months than had earlier estimated. For example, Kajaria Ceramics, the largest manufacturer of ceramic/vitrified tiles in India and the 9th largest in the world, has cut down its full year volume guidance from 15% to 12-13%. Even Somany Ceramics is now less optimistic about its prospects during the current financial year than the company was in the beginning of the year. Ceramics industry which is struggling due to poor demand, received a double whammy when NGT, in the month of March, ordered discontinuation of coal gasifiers by the ceramic tiles manufacturers. For the unorganized segment, the cost and working capital requirement has increased post switch over to LNG (from coal gasifiers) and as a result the product price gap between organized and unorganized players has started to come down, benefitting the organized industry.
Wood panel industry too affected
A continued slowdown in the housing market has hit growth prospects of wood panel industry too. Apart from problems on the demand side, wood panel industry also faced hiccups on raw material supply side. However, of late, the industry has zeroed in on Gabon veneer and at least on short to medium term its problems on raw material front seemed to have been resolved. However, prices of some materials like glue are linked to the price of crude oil price and any spike in the price of crude oil will impact the cost of production of wood panels. Also, industry is facing some problem of dumping of cheap varieties by the foreign manufacturers. Also organised players complain that formalisation of the industry is taking much longer time than expected. All these issues are impacting performance of the industry.
Decorative paints are least affected
On the other hand, decorative paints industry has surprised many because of its splendid growth in the first quarter of the current financial year. This performance has come on the backdrop of poor health of real estate sector and a general belief that the economy is facing slowdown. Paint manufacturers have achieved double digit growth in the first quarter of the financial year 2019-20 which is commendable under trying circumstances. For example, Asian Paints, the market leader, achieved a sales growth of 19% and volume growth of 17-18% during the first quarter. Kansai Nerolac the second largest paint manufacturer, also registered double digit growth in decorative paints segment while automotive segment saw double digit decline in revenue growth. Snatching market share from unorganised sector, focusing on lower end of the market and expanding distribution network to tier 2&3 cities have helped the organised paint manufacturers to register decent growth in the first quarter against heavy odds against them. Also, vibrant home improvement market helped their cause to an extent.
Glass industry too is less affected
Glass industry is another sector which has remained relatively unharmed by the slowdown in realty sector. Despite a slowdown in the realty sector post RERA and GST, growth in the architectural glass segment has remained buoyant mainly for the large organized players, who are clearly benefiting from the policy reforms. With small time and marginal players in realty sector fast vanishing from the scene, market for unorganised sector players is expected to shrink further.
However, recent pick up in Monsoon is a good sign for the industry. Good rains followed by good agricultural production can help to revive the rural demand. This may give the building materials industry much needed respite in the short term.