Construction Materials India; Cement

2098
Cement

Cement prices-high in South. Cement prices in South were up by Rs5/bag mom in March 2019-prices in South have increased by Rs45/bag since January 2019, per our channel checks. Prices declined marginally by Rs1-11/bag in North, Central and West-thus, all-India prices were flat at Rs334/bag. We note that after recent increase, prices in South are at Rs30-50/bag premium to other regions despite lowest plant utilizations among all regions. Higher prices will aid near-term earnings for companies with large South and West presence-ACC, Ultratech (among pan-India) and Dalmia Bharat, India Cement and Orient Cement (regional names) will gain more. We maintain our cautious stance on the sector on expensive valuations.

Cement prices in March 2019—mostly hold on to the increases led by South markets

All-India cement prices were steady at Rs334/bag mom in March 2019 led by increases in South and East regions, per our channel checks. Cement prices in the South and East regions increased by Rs5/bag to Rs362/bag and Rs332/bag, respectively. In North and Central regions, prices declined by Rs3-11/bag mom while West region saw a price decline of Rs1/bag mom.

We note that post the sharp increase in past two months, prices in South markets are now Rs30/bag higher than 3QFY19 average, followed by Rs9/bag increase in West region. Prices are steady with change of Rs(1)-5/bag in North, Central and East markets. Based on current price trend, we estimate 4QFY19 realizations for cement companies to increase by 2-3% qoq—price increases will be higher for companies with large exposure in South region (+4-5% qoq) (Exhibits 1 and 2). We note that after recent increase, South prices are at premium of Rs30-50/bag to other regions-but South markets still have the lowest plant utilizations across all regions.

Cost respite from lower energy prices to reflect from 4QFY19 earnings

Imported pet-coke prices increased 5% to US$97/ton in March 2019-however, prices are still lower by 20% from 2QFY19. Domestic pet-coke prices increased 3% to Rs9,150/ton in March 2019-but domestic prices are down by 3% from 2QFY19. Given lagged impact of inventories (companies carry 45-60 days of inventory), we expect energy cost of companies to decline in 4QFY19 as domestic pet-coke prices declined by 3% qoq in 3Q and 2% qoq in 4Q. We note companies source a larger part of their pet-coke requirement (~60%) from domestic sources.

4QFY19 spreads improve on high prices; especially for those with large South presence

Exhibit 3 highlights monthly spread movement between cement prices and energy costs (assuming 70% pet-coke usage). Spreads are up by 5% for pan-India names in March 2019 led by 2-3% qoq cement price increase and lower pet-coke costs. We expect spread increase to be higher for companies with large presence in South and West regions-among companies under our coverage, this should benefit more the near-term earnings of ACC, Ultratech (among pan-India) and Dalmia Bharat, India Cement and Orient Cement (large presence in South, West).

Industry volumes increase by 11% yoy in January 2019

As per DIPP data, industry volumes increased by 11% yoy to 30 mn tons in January 2019-we note that strong volume growth was despite a high base (20% volume growth in January 2018) though 3-year CAGR works out to 5% (this accounts pre-demonetization year as base year, i.e. January 2016). For April 2018-January 2019, cement production volumes increased by 14% yoy to 276 mn tons. Management narratives indicate strong demand from the infrastructure sector even though demand from the trade segment is relatively subdued.

Maintain cautious stance on the sector on expensive valuations

We maintain cautious stance on the cement sector on expensive valuations and on expectation of moderate improvement in earnings over the next 2 years. We believe large capacity addition will keep industry utilizations low (<72%) over the next 2 years and will cap the overall improvement in profitability. Valuations of large cap cement names are expensive at 12-16X FY2020E EV/EBITDA.

Region-wise cement price trend for March 2019

  • North—prices decline by Rs3/bag. Cement prices in the North declined by Rs3/bag to Rs306/bag in March 2019—prices have declined post Rs9/bag increase in previous two months. Prices were steady in Rajasthan, but declined by Rs5-10/bag in Haryana, Himachal Pradesh and Delhi.
  • Central—prices decline by Rs11/bag. Cement prices in the Central region declined by Rs11/bag mom to Rs328/bag. Per our channel checks, prices declined by Rs15/bag in Madhya Pradesh and by Rs8-10/bag in Uttar Pradesh.
  • West-prices decline by Rs1/bag. Cement prices declined in the West region during the month by Rs1/bag to Rs314/bag. Per our checks, prices declined by close to Rs15/bag in Gujarat in cities such as Ahmedabad, Baroda, Surat while increased by Rs5-10/bag in Maharashtra.
  • South-prices increase by Rs5/bag. Cement prices increased by Rs5/bag on average in the South region to Rs362/bag. Prices increased by Rs5/bag in Andhra Pradesh and Tamil Nadu and by Rs10/bag in Karnataka.
  • East-prices increase by Rs5/bag. Cement prices in East increased by Rs6/bag to Rs332/bag in March 2019. Our checks indicate that prices increased by Rs5-15/bag in states of Odisha and West Bengal but declined by Rs5/bag in North-East states.

“Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Abhishek Poddar, Murtuza Arsiwalla, Prayatn Mahajan.”

Ratings and other definitions/identifiers

Definitions of ratings

  • BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
  • ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
  • REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
  • SELL. We expect this stock to deliver <-5% returns over the next 12 months.
  • Our Fair Value estimates are also on a 12-month horizon basis.

Other definitions

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