Covid-19 to stretch credit cycle, up working capital needs
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Risks mount for the cement supply chain
Like all other sectors of the Indian economy, cement has been hit hard by the Covid-19 pandemic, and has seen the entire supply chain disrupted.
To gauge the impact, CRISIL Research conducted a survey of 100+ dealers across 13 states. Notably, trade channels account for ~60% of total annual sales of cement and are, therefore, a vital indicator of the sector’s condition.
The findings indicate a stretched credit cycle, which will elevate their working capital levels.
Key takeaways from the survey
Almost all the dealers foresee 10-30% drop in demand in fiscal 2021 due to delay/freeze in construction activity
More than 60% respondents have a minimal inventory of 2-4-days, but spoilage is a concern nonetheless
The dealers’ credit cycle is likely to get stretched from 4 weeks to 8 weeks over the next 2-3 quarters
Working capital requirement is expected to increase 12-17% in a best case scenario, assuming dealers are able to limit operational expenditure, reduce credit sales and infuse additional capital in their business. A probable risk of retailers defaulting on payment dues will aggravate the financial pain
Traders are hoping for manufacturers’ support in terms of better margins (higher incentives)
Chances of swift resumption to normalcy post the unlocking look bleak because of delay in return of migrant workers and resumption in freight operations
Urban centres are likely to fare worse than rural ones given higher dependence on migrant labourer