Cement Monthly Sector Update - Realizations Softened on Insipid Demand - Reliance Securities

Demand environment continued to remain dismal in Dec'16 led by impact of demonetization, which affected trade segment sales in most pockets. However, price cut (-2.2% m-o-m) undertaken by the industry aided monthly demand to improve as most companies saw a monthly volume uptick in the range of ~5-15%. Notably, there has been a pickup in the construction of selected real estate projects as many developers intend to complete their projects before the implementation of new Real Estate Bill. Though all India average cement price has been subdued and declined 2.2% month-on-month (m-o-m) in Dec'16, average price increased by ~4.3% yoy mainly on account of sharp yoy improvement in Northern (+15.8% yoy) & Western realizations (+8.9% yoy). Notably, there had been a sharp price drop in Northern & Western regions in Dec'15 (~Rs30/bag) led by price cut taken by the companies to push volume so as to meet year-end sales target. Further, barring Southern markets, all regions saw a price correction of ~2-4% m-o-m in Dec'16.

3QFY17E: Cement sales volume is expected to be dismal for cement companies due to cash crunch across the country following demonetization drive which dragged demand in trade as well as IHB segments. Further, impact of hike in fuel price and wage are likely to drag margins. Further, we foresee that average cement price is up by ~1.9% yoy and down by ~1.1% m-o-m during the 3QFY17.

Key Takeaways

- Most dealers are of the view that demand is likely to remain moderate in Jan'17 and expect to bounce back in Feb'17 with the more improvement in currency circulation, likely lifting of bank withdrawal limit and ease in winter / wedding seasons. They further cite that pricing are unlikely to see any further correction in many pockets and expect a gradual recovery with the pick-up in demand environment.

- Unlike expectations, price cut (-2.2% m-o-m) undertaken by the industry aided improvement in monthly demand as most companies saw a monthly volume uptick in the range of ~5-15%.

- Though all India average cement price has been subdued and declined 2.2% m-o-m in Dec'16, average price increased by ~4.3% yoy mainly on account of sharp yoy improvement in Northern (+15.8% yoy) & Western realizations (+8.9% yoy).

- Notably, there had been a sharp price drop in Northern & Western regions in Dec'15 (~Rs30/bag) led by price cut undertaken by the companies to push volume so as to meet year-end sales target. Further, barring Southern markets, all regions saw a price correction of ~2-4% m-o-m in Dec'16.

- We continue to believe that this is just a temporary postponement of demand, which will improve with the rise in circulation of currency, which will essentially lead to better demand from IHB segment that accounts for >50% of total consumption. Given the sharp hike in fuel prices and likely full impact of wage hikes, we envisage an imminent price hike in the near-term.

Source : Equity Bulls

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