Building Materials: Demand destruction certain, benefits of formalisation in FY19
Channel checks suggest real estate prices in Delhi/Mumbai declined by 15-20%. After 5-7 year growth (seemingly secular), building material revenues decelerated over the past few quarters; demonetisation will accelerate slowdown with high likelihood of demand shrinkage in 2HFY17/FY18. Channel expects weak demand (new and refurbishment) and rise in inventory though they are witnessing increased recovery of debtors, leaving only little liquidity support required from the companies. Barring paints, we hear little effort from companies to move the channel quickly to non-cash mode of dealings. In the entire building materials space, we expect the more organised, staple-like segments (pipes/cement/adhesives) to recover quicker; discretionary segments (ply/tiles) are more prone to sharper decline and for longer duration. Informal players will not only see cost of operations rise but in many cases find business becoming unviable; ply (70% unorganised) should benefit most from formalisation but only after surpassing tough FY18. We are BUYers on Pidilite, Supreme and Century Ply and expect highest cuts for Century among the three companies. (Nitin Bhasin, +91 22 3043 3241)
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