Cement Monthly Sector Update - Dealers check: Better Demand Prospects Ahead; Prices Stay Flat - Reliance Securities

Demand environment softened on a Month-on-Month (MoM) basis in Jan'17, as festivals and political issues especially in Southern and Northern markets impacted the volume growth. Further, a persistent dismal scenario in IHB segment post demonetization has been taking a toll on demand as this segment accounts for >50% of total cement demand in the country. However, pricing scenario remained broadly flat in Jan'17 on a MoM basis despite ~2% average price correction in Southern markets owing to price cuts in the AP/Telangana pockets. Notably, there has been a sharp upsurge in non-trade segment sales due to contraction in IHB segment, which is also being supported by pick-up in construction of selected real estate projects as many developers intend to complete their projects before implementation of new Real Estate regulations. Though all-India average cement price remained flat in Jan'17 on MoM basis, average price rose by ~4.0% YoY mainly due to sharp improvement in Northern (+20.3% YoY), Central (+10.3% YoY) & Western (+5.7% YoY) regions. Most dealers cite that though there has been an upward bias of price recovery in several pockets for the last three months, prices are likely to remain subdued owing to: (a) balance two months of the fiscal may lead to a price war between the companies to increase their sales volume, (b) persistent demand pressure from rural and IHB segment; and (c) increasing sales from non-trade segment restrict price hike in trade segment.

Key Takeaways

- Continued dismal demand from IHB segment, festivals and political issues led to soft demand in most pockets in Jan'17, which is expected to bounce back from this month onwards.

- Pricing scenario has remained broadly flat in Jan'17 on MoM basis despite ~2% average price correction in Southern markets owing to price cuts in AP/Telangana pockets.

- Though all-India average cement price remained flat in Jan'17 on MoM basis, average price rose by ~4.0% YoY mainly due to sharp YoY improvement in Northern, Central & Western realizations as sharp price cut was witnessed in Northern and Central markets last year. Further, recent price recovery in Western markets led to sharp YoY realization improvement in Western region.

- With increased cost pressure led by higher fuel prices and likely pick-up in demand in the busy season, cement companies have been mulling to undertake price hikes for last two months. However, barring few pockets (especially in Western), they have not been able to do so due to prevailing dismal demand scenario.

Outlook and Valuation

We foresee that with the government's positive intention to revive agriculture/rural economy - which was seen in Budget 2017-2018 in terms of a slew of stimulus - is likely to pay off cement industry in FY18E. Further, slower capacity addition and incremental demand from proposed "Housing for All" scheme, "Smart City" projects and commencement of construction of Metro/Irrigation projects are likely to aid in improving utilizations of the industry and profitability in the long-term. We firmly believe that the cement industry is a perfect bet on infrastructure boost and likely revival of the rural economy in India owing to better balance-sheet of cement companies and likely improvement in return ratios, which will aid the companies to get re-rated in ensuing quarters. We maintain our positive stance on J.K. Cement, Ramco Cements, Mangalam Cement and HeidelbergCement India.

Source : Equity Bulls

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