India Cement Sector - Prices spike despite demand slowdown - Anand Rathi

We recently interacted with cement dealers in various regions of India to gauge the ground-level situation with regard to demand and prices.

Below are takeaways from our discussion:

North. In Sep'13, cement prices moved up by Rs. 60 in Jaipur, with retail prices at around Rs. 260 and wholesale at Rs. 250. Demand has picked up in Jaipur; however as per dealers, further price hikes are difficult to sustain. New brands such as 'Wonder Cement' have been absorbed without much damage to others. In other regions such as Delhi and Gurgaon, prices increased by Rs. 40. Lafarge is likely to enter northern markets from Oct'13.

Central. In Sep'13, prices in Agra (East UP) have risen by Rs. 40 to Rs. 250, despite a slowdown in volumes. Prices in Bhopal (MP) have increased by Rs. 20 in Sep'13. Demand has been slow and understanding between manufacturers is working well for price hikes.

West. In Pune, prices rose by Rs. 15, with retail prices at ~Rs. 300 and wholesale at ~Rs. 280 (up Rs. 60/bag in Sep'13). Dealer checks suggest that any further price hike may not be absorbed without improvement in demand. Mumbai retail prices have increased by Rs. 15 and are at Rs. 310 even as demand is flat m-o-m.

East. In various pockets, prices have increased by Rs. 10 in Kolkata and Bhubaneshwar. While demand from real estate is strong, work on infrastructure projects has slowed, resulting in poor demand. Retail prices in Bhubaneshwar are Rs. 340. Patna has seen a rise of Rs. 20/bag in Sep'13 to Rs. 305.

South. In Bangalore, cement prices in Sep'13 rose by a staggering Rs. 70 per bag in non trade and Rs. 10 per bag in trade. Demand is better than last year. Retail prices in Chennai are at around Rs. 315 even as demand remains weak. Prices in Hyderabad increased by Rs. 50/bag in Sep'13, though it continues to suffer from a capacity glut and an increase in supply from JPA and JSW. Retail prices are at around Rs. 270.

Gujarat. On our road trip, we met cement dealers across the state. According to them, cement prices in the state increased by Rs. 20-25 in Sep'13, whereas demand remained muted. Major brands in the state include UltraTech (40%), Ambuja (10%), Jaypee (10%), and Hathi (10%). Jaypee is currently trading at a discount of Rs. 10-15/bag to UltraTech, which will benefit UltraTech post completion of Jaypee's Gujarat Unit acquisition.

Our take. With the beginning of the construction season and firmness in prices, we favour companies which possess characteristics of a pan-India play (UltraTech), with efficient operations (Shree Cement) and attractive valuations (Madras Cement). We view the recent correction seen in 2QFY14 as opportunities to accumulate. Top picks. UltraTech, Shree Cement, and Madras Cement.

Source : Equity Bulls

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