Cement - Steep Decline in Prices Last Month, But Recovery Likely - Nirmal Bang

As per our recent channel checks, cement prices in India have declined by Rs10-Rs40/bag across regions in August 2013. Demand was poor due to subdued construction activity owing to heavy rains, floods in some states and overall economic slowdown. We had interactions with ~25 dealers across regions and the consensus view was that cement demand would improve in the coming months, thereby leading to a gradual increase in prices (rise of ~Rs10-Rs15/bag within a week's time). While 2QFY14 would continue to be weak quarter in the wake of poor sales volume and lower realisation, we believe the recent steep fall in cement share prices has largely factored in the likely subdued performance, but a gradual recovery in cement demand as well as prices in 2HFY14 would boost share prices. Therefore, we have retained our positive view on the cement sector.

Steep decline in cement prices last month, but recovery likely: In August 2013, news flow on cement prices was negative and most of the regions across India witnessed a fall in cement prices by ~Rs10-Rs40/bag (on month-on-month basis) due to weak demand during the monsoon season coupled with the economic slowdown. Andhra Pradesh (especially Hyderabad) witnessed a steep fall in cement prices by ~Rs40/bag from their peak of ~Rs300/bag. Also, most of the other regions witnessed a decline in prices in the range of Rs10-Rs20/bag. Overall cement prices were down 8% YoY and 5% QoQ. The consensus view among dealers was that cement prices have bottomed out and they expect a recovery in September 2013 (Rs10-Rs15/bag in a week's time) on the back of improvement in demand.

Weak cement demand across regions, but recovery expected in 2HFY14: Cement demand remains poor across regions due to subdued construction activity owing to heavy rains and the economic slowdown. Players in the southern region witnessed volume growth YoY due to a low base in August 2012. However, most of the other regions witnessed YoY decline because of early and severe monsoon rains (last year, the monsoon season was delayed till early September). Most of the dealers are optimistic about improvement in demand in the medium-term led by pickup in individual housing construction driven by a good monsoon, beginning of overall construction activity post monsoon, improvement in the execution of recently cleared/stalled construction projects and pre-election spending on infrastructure by central and state governments.

We remain positive due to reasonable valuations and likely improvement in fundamentals: We expect 2QFY14 to be a weak quarter for the cement sector because of likely lower sales volume and a steep decline in cement prices coupled with an increase in operating costs due to rise in the prices of diesel and imported pet-coke. However, we believe the recent correction in stock prices have largely factored in the likely poor quarterly performance and they trade at reasonable valuations (large-cap companies' stock valuation below replacement costs and midcap companies' stock valuation at a significant discount to replacement costs). Hence, we remain positive on the cement sector considering likely improvement in demand from 2HFY14 leading to a recovery in cement prices. From our coverage universe, we prefer UltraTech Cement, Grasim Industries and Shree Cement among large-caps, and JK Lakshmi Cement and JK Cement among mid-caps because of their attractive valuations.

Source : Equity Bulls

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