Weak Outlook for Indian Property Developers to Affect Cement and Steel Demand: Fitch
Weak property demand and a sluggish construction cycle to cause India's cement consumption to drop by more than 15% in the financial year ending March 2021 (FY21), as more than 65% of domestic cement demand is driven by the housing segment, says Fitch Ratings.
 
Fitch says it expects property developers' operating cash flow to deteriorate on weak demand stemming from low consumer confidence caused by business uncertainty and unemployment concerns, despite falling home-loan interest rates and cuts in transaction costs by some local governments. Lower labour availability and disrupted raw-material supply chains are also leading to construction delays.
 
"We expect a contraction in pre-sales to slow the reduction of unsold inventory, which has come down to 450,000 units, from around 700,000 units in 2015. New project launches are also likely to slow as developers look to preserve liquidity and given customers’ preference for completed properties to mitigate execution risk. This could improve the demand and supply balance in the medium term," it added.
 
 
The Reserve Bank of India (RBI)'s recent measures, including loan restructuring, moratoriums and relaxed lending limits, provide temporary funding relief to the property sector. However, Fitch says, the underlying appetite of financial institutions to lend to the sector is likely to remain weak until there is a broader improvement in the sector's operation, with better end-user demand and pricing support.
 
Even before the pandemic, India’s property market faced weak investor demand, high unsold completed inventory and stagnant prices. The weak sector fundamentals coincided with regulatory changes, like the implementation of the Real Estate (Regulation and Development) Act, 2016 and the demonetisation of currency notes, which limited advance collections and cash flow fungibility across projects.
 
Credit availability from non-bank financial institutions also fell following the default of two non-bank financial institutions in September 2018 and June 2019.
 
 
According to the ratings agency, the multitude of issues at Indian financial institutions has allowed private equity to emerge as a major investor in the country’s property sector, with more than $40 billion invested over the last decade. However, it says, the near-term outlook for the continued inflow of private-equity capital remains uncertain, given the global nature of the current downturn.
 
Fitch says it expects developers with weak financial profiles or a focus on high-end projects, who are unable to avail the benefits of the reserve bank's restructuring scheme, to be most affected. It feels, narrower capital access would lead such developers to tie up with large and reputable ones with strong financial profiles, creating significant opportunities for consolidation and market share gains for the stronger developers.
 
The ratings agency believes an ability to cut property prices to revive demand and improve collections varies across segments and depends on the strength of developers’ financial profiles. It says, "This is notwithstanding our expectation that weakness in property demand is broad based across pricing segments, as the uncertain business environment affects the luxury segment and weak consumer confidence impacts the mid-income and affordable-housing segments."
 
"We expect luxury real estate to see the greatest price moderation in light of its discretionary nature and headroom from higher profit margins. Developers in the mid-income and affordable-housing segments may try to spur demand, especially during the upcoming festival season, by offering flexible payment and price protection plans or waiving registration charges, among other incentives. We expect limited price moderation in affordable housing, given the segment’s better demand dynamics and thinner," Fitch added.
 
According to the ratings agency, a slowdown in real estate and overall gross domestic product (GDP) growth to cause a decline of more than 15% in cement consumption in FY21, following a low-single-digit drop in FY20. Easing of lockdowns spurred pent-up demand and softened the yoy fall in India’s monthly cement production to 7% in June 2020, from a drop of 86% in April and 22% in May, according to government data. 
 
 
Nonetheless, cement production declined by 14% in July, as weak demand coincided with the seasonal onset of the monsoon. 
 
Many large cement companies reported strong profitability in 1QFY21, with disciplined pricing underpinning realisations. In addition, lower operating leverage, coupled with low energy costs and fixed-cost savings, cushioned the blow of a more than 30% plunge in volume. 
 
Fitch says, "We believe larger producers are better positioned to navigate the downturn, as their strong brand recognition supports pricing in India’s largely retail-oriented cement market. In addition, strong distribution capability, captive raw-material sourcing and investments in energy efficiency (waste heat recovery) drive cost efficiency. We expect financial flexibility to remain strong for larger companies, considering their strong capital structures and prudent investment approaches in the current environment."
 
Meanwhile, steel demand is likely to fall by around 10%, supported by a lower hit to demand from other sectors, the ratings agency says adding, "Steel producers that focus on long steel products for construction, such as bars, wires and beams, tend to be small in scale and less efficient; we expect these producers to see a larger drop in volume than for larger steel manufacturers."
 
Fitch says steel’s exposure to real estate is lower than for cement, with sectors other than construction and infrastructure accounting for around 40% of overall demand. "Producers of long products that are used for construction, such as bars, wires, beams, angles and other structural shapes, comprise many small entities whose access to funding and technology is weaker than for Fitch-rated names," the ratings agency concludes.
 
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    Competition Commission of India Dismisses Antitrust Complaint against Amazon
    On 11th September, the Competition Commission of India (CCI) dismissed a complaint of alleged unfair business practices against Amazon Seller Services Pvt Ltd, Amazon Export Sales LLC and Cloudtail India Pvt Ltd.
     
    A case of alleged abuse of dominance by Amazon had been filed by the parent company of Dutch apparel brand Beverly Hills and Polo Club (BHPC). The complaint by Lifestyle Equities CV and Lifestyle Licensing BV had claimed that Amazon engages in deep discounting, preferential seller treatment, and allows the sale of counterfeit goods on its platform, all of which have hindered Beverly Hills and Polo Club’s entry into the 'online fashion retail' market in India.
     
    Netherlands-based Lifestyle Licensing BV is the proprietor of the brand Beverly Hills Polo Club (BHPC), while Lifestyle Equities CV is its licensee, which in turn has appointed an exclusive licensee, Major Brands India Pvt Ltd for India. 
     
    The informants had claimed that Amazon Sellers Service was creating unfair market conditions and barriers for market entry in India through its dominance on the online fashion retail space and its affiliates—Amazon Export Sales and Cloudtail India.
     
    The complaint had also alleged that Amazon was selling counterfeit, unauthorised and unlicensed products of the BHPC brand at rates three times lesser than that of the original products. The company had claimed that the practice has caused reputational harm to the company.
     
    It was also alleged that Amazon provided deep discounts on products sold through Amazon and Cloudtail while giving them higher search rankings and ensuring better customer reviews. This has also affected the competition within the suppliers’ market.
     
    Cloudtail India (a joint venture of Amazon Asia Pacific Holdings and Infosys founder Narayan Murthy’s personal investment vehicle Catamaran Ventures) is the largest seller on Amazon. Amazon Asia controls less than 25% in the company.
     
    The informants stated that they do not sell any of their fashion products under the BHPC brand on Amazon's e-commerce platform. Their informants are selling their fashion products only through their own website www.bhpoloclub.in and in the past sold through exclusive licensee and Tatacliq.
     
    However, Amazon allegedly offered counterfeit/unlicensed/unauthorised products of the informants at 'unfair, discriminatory and/or predatory prices'.
     
    The competition regulator, however, concluded that Amazon did not have a dominant position in the relevant market. CCI noted that vertical online fashion retail players such as Myntra, Ajio, Koovs etc held a market share of around 50%, while the combined share of horizontal online marketplaces, Amazon and Flipkart was around 35%, quoting a RedSeer report from June 2019.
     
    The CCI order said “In the absence of dominance, the question of abuse of dominant position does not arise.”
     
    While directing that the case be closed, the fair trade regulator said “It seems unlikely that the alleged conduct would have the alleged appreciable adverse effect on competition, to conclude a prima facie case of contravention”.
     
    On the issue of reputational harm caused to the brand from sale of counterfeit products, “The issue does not lend itself to antitrust scrutiny,” the fair trade regulator said. The CCI asked the informants to address the issue with other appropriate legal or regulatory instruments.
     
    Separately, on 10th August, the All India Online Vendors Association (AIOVA), an umbrella organisation of small traders, has also alleged in its filing that Amazon tends to favour select retailers who give online discounts that drive independent vendors out of business. 
     
    Several sellers have earlier filed complaints against the e-commerce giant alleging anti-competitive practices by preferential treatment of seller entities like Cloudtail, Amazon Retail and Amazon Wholesale, where it either holds a stake or they are its group companies.
     
    It has also been alleged that Amazon uses the data of products on its e-commerce platform to decide what to sell under its own brand.
     
     
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    COMMENTS

    m.prabhu.shankar

    2 weeks ago

    As per news, Amazon is going to buy 40% of Reliance Retail. Hence obviously, all the cases against Amazon will be closed shortly as well as should not be a surprise if the entire Central Cabinet receive Jeff Bezos in the airport next time when he visits India. Last time none of them met Jeff and there were some statements complaining about Amazon's practices as well by one of the ministers. But nothing any more. Amazon is Bharathiya from now on.

    Newme

    2 weeks ago

    eBay will give Amazon and Flipkart a run for their money. Unfortunately eBay is closed in India, Indian consumers are denied the benefit of direct purchase from Chinese suppliers.

    Pent-up Demand Supports Textile & Apparel Recovery in 2QFY20-21: Ind-Ra
    Indian textiles companies have significantly increased their plant capacity use in August 2020 with the easing of lock-down restrictions. The increase in demand in domestic and overseas markets will lead to recovery in textile and apparel industry during the second quarter (2Q) of FY20-21, says India Ratings and Research (Ind-Ra).
     
    In a report, the ratings agency says, "We expect both the segments’ volumes to have corrected to 50%-80% in August 2020 and reach 70%-80% of normal over September 2020, led by pent-up demand and strong export order build up in all the segments. Both man-made fibres and cotton segments should start benefitting from the low raw material prices in 3QFY21. We expect raw material prices to remain moderate in 2HFY21."
     
    Ind-Ra says it will continue monitoring the domestic demand recovery along with export markets in the US, Europe and China which are the major hubs for Indian textiles products.
     
    According to the ratings agency, textiles players’ weak profitability over the first half (H1) of FY20-21, along with supply chain disruptions, has impacted cash flows; while the moratorium announced by the Reserve Bank of India (RBI) under the COVID-19 relief package has provided the inevitable liquidity support. However, the lifting of moratorium from 1 September 2020 without the full recovery in cash flows would require additional caution and monitoring of cash flows, it added. 
     
    Ind-Ra says, "Some of such stressed issuers, mostly in the sub-investment grade rating category, may opt for the RBI announced one-time loan restructuring to survive the imminent liquidity challenges. We expect textiles players to record 15%-35% decline (year-on-year- y-o-y) in their top line and 20%-50% yoy drop in operating profits over FY20-21."
     
    During August 2020, prices of textile products have recovered broadly from the lows of April-May 2020. International cotton prices (US) continued to recover in August 2020 by 4% month-on-month (mom), after dipping in April 2020. Indian cotton prices increased about 5% m-o-m in August last week, following a partial correction in the international prices over July 2020. Cotton arrival is almost complete in the current season while Cotton Corporation of India (CCI) continues to procure to support cotton prices. 
     
    According to the ratings agency, plant utilisation of pure man-made fibres and yarn manufacturers was severely impacted over 1QFY20-21 amid the COVID-19-led lock-down. However, it says, volume recovery of pure man-made fibres and yarn should be quick but has started relatively late from August 2020, while the cotton and blended spinners’ volumes have started recovering from June 2020.
     
    Fibre and yarn prices have been steady in August 2020, while discounts are also offered in few segments to boost sales. Cotton yarn and blended yarn prices largely remained flat in August 2020, despite demand recovery as the supplies also increased steadily. Moreover, margins of large spinners could remain under pressure as their cotton season procurement was at about 10% higher prices and operating utilisations are still below optimum levels.
     
    Ind-Ra says it expects fabric and apparel prices to have declined in August 2020, led by a quick supply restoration than demand recovery. During July-August 2020, most players have resorted to discounts to boost sales and also generated the much-required internal liquidity. Disbursement of COVID-19 bank loans and promoter-led infusions also supported liquidity and the ability of fabric and apparel players to ramp up operations quickly in these segments. Ind-Ra expects apparel prices to remain modest in 2HFY20-21 to push sales. 
     
    Readymade garments exports recovered significantly starting June-July 2020, the ratings agency says, adding, that order book build up in August 2020 was strong, supported by restocking at global retailers and global sector consolidation. "Large Indian players are benefitting from the shift in market share to India from China. Large apparel and readymade garment manufacturers have largely been able to resolve labour mobility and availability concerns," it added.
     
    According to Ind-Ra, demand for home textiles has been only moderately impacted as they are necessary products for day-to-day life. However, it says, US-China trade war has impacted imports from China into the US, thus giving a strong push to exports from India. 
     
    "We expect the demand for home textile exports to sustain in 2HFY21 at healthy levels achieved over August-September 2020. We also expect Indian players to increase their already strong market share in terry towels and bed linens, led by supply chain diversification away from China," the ratings agency concludes.
     
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