Cement - Dealers check: Moderate price correction on seasonal impact - Reliance Securities

All India average cement prices corrected by ~2% month-on-month (m-o-m) in July'16 mainly driven by a decline in construction activities owing to heavy rains in most parts of the country. Notably, though Northern & Central regions witnessed maximum correction to the extent of ~4-5% m-o-m in July'16, the prices in these regions are still ruling higher (~26% yoy &~14% yoy) due to substantial recovery seen over Apr-June'16. Prices in Western region corrected by ~3% m-o-m with extended monsoon, as volume declined ~20-40% m-o-m recorted in several pockets of the region during the month. However, dealers are of the view that favourable monsoon will result in demand growth from Oct'16 onwards. Notably, due to delayed monsoon, below average rain in selected pockets, low price base and pre-monsoon construction activities, Eastern markets witnessed an average price rise of ~2% m-o-m. Notably, as most dealers stated that there has been better demand environment this year compared to last year, they do not expect any meaningful seasonal correction. Further, favourable monsoon will have a positive impact on demand and pricing as well. Unlike FY16, the pricing scenario is likely to improve in FY17E mainly on account of: (a) favourable demand environment to be aided by low base, infra boost and visible favourable monsoon; (b) likely consolidation; and (c) possible reversal of cost benefits.

Outlook and Valuation

We expect an uptick in demand scenario on the backdrop of expected pickup in construction activities especially from the projects awarded in last 12-18 months and likely improvement in rural consumption on the backdrop of favourable monsoon. Notably, slower capacity addition and incremental demand from proposed "Smart Cities" project & "Housing for All" scheme / capital formation in Andhra Pradesh are likely to aid in improving utilizations of the industry and hence profitability in the long-term. At the CMPs, we maintain our positive stance on UltraTech Cement in Large-cap space, while in Mid-cap space we prefer J.K. Cement, JK Lakshmi Cement & Mangalam Cement.

Source : Equity Bulls

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