Cement - Sector Update - Road trip & dealer checks - concrete movements - Centrum

Road trip & dealer checks - concrete movements - Rajesh Kumar Ravi

We took a road trip across Rajasthan and Gujarat, interacting with various cement dealers and marketing managers. Our interactions indicate both states have grown at 8-10% CAGR over the last two years. While steady demand momentum continues in Gujarat in Q1FY17, demand has recently moderated in Rajasthan. Our Pan-India dealers' check reveals modest to weak cement demand in Jun 2016 across most markets in India. Overall, dealers suggested satisfaction with monsoon progress. During Jun 2016, cement prices surged 9-10% MoM in north and central regions, led by persisting supply discipline in these regions. This also buoyed price recovery by 4% MoM in western region. In south, price increased 3% MoM led by continued recovery in AP/Telangana prices. In east, prices remained flat on account of higher competition and weak demand. We expect Q1FY17 realisation of north and central region players to increase 8-10% YoY (on a low base of last year), followed by 2-4% YoY increase for western region. We expect 0-2% YoY decline for players in south (on a high base of last year) and east. Our top picks are JK Cement, Deccan Cement, Ramco Cements and Star Ferro & Cement.

- Gujarat and Rajasthan market road trip - key takeaways: We visited five major cities in Gujarat and Rajasthan, and interacted with cement dealers and marketing managers. Cement demand across both states grew at 8-10% CAGR over the last two years, and their market size currently stands at 20mnMT per annum each. In Q1FY17, sales in Rajasthan have grown at 2-4% YoY while it grew at 5-8% YoY in Gujarat. Cement demand is more concentrated across 5-6 major cities in Gujarat, while it is dispersed across the state in Rajasthan. Supply discipline across Rajasthan-based companies has boosted prices in the state as well as in adjoining markets.

- Pan-India dealers' feedback: Weak demand across India in Jun 2016: Cement dealers' survey in 32 cities across India indicates weak demand in the north and east, Maharashtra and south (ex-AP/Telangana) in Jun 2016. Central region and Gujarat registered better growth during the month. Demand in AP/Telangana markets continued to grow in June. Sand availability has improved in Gujarat and the central region. Overall, dealers suggested satisfaction with monsoon progress.

- Strong price rise MoM in North and Central regions, east and south weak: Cement prices rose 9-10% MoM in the northern and central regions, largely owing to supply discipline by cement companies. Western region recorded 4% MoM increase. Prices in south rose 3% MoM led by strong recovery in AP/Telangana. Prices in east remained flat MoM. Dealers highlighted overall flattish price trend for July as ensuing supply discipline would largely offset weak demand during the rainy season. However, during July-Sep (rainy season), dealers expect cement prices to correct by ~Rs10-25/bag, with larger correction expected in the northern and central regions. Average price in east is now below that in the northern and central regions which, in our view, should reduce supply pressure in east and drive price recovery post monsoon.

- Outlook and top picks: The sharp improvement in cement prices in the northern and central regions over the last 3-5 months (led by supply discipline) should boost companies' Q1FY17E realisation in these markets by 8-10% YoY (also aided by low base effect). In the western markets, while prices have significantly improved in Gujarat, the prices in Maharashtra markets are yet to fully recover. We expect Q1FY17 cement realisation in western markets to rise ~2-4% YoY. Q1FY17 cement realisation in south and east-based companies should decline 0-2% YoY. We expect a good monsoon this year to boost overall rural demand and improve water availability for construction. JK Cement, Deccan Cement, Ramco Cements and Star Ferro & Cement are our top picks.

Source : Equity Bulls

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