Cement Sector - Monthly Update - Prices Inch-Up on Moderate Demand Recovery - Reliance Securities

Demand environment witnessed a mild recovery in Feb'17 on Month-on-Month (MoM) basis on the back of visible pick-up in construction activities after being marred in Jan'17 due to festivals and wedding season. Barring Southern markets, all regions witnessed an improvement in demand in Feb'17. Further, pricing scenario also saw a moderate improvement in tandem with demand on MoM comparison despite ~2% correction in average price in Southern markets owing to price cuts in most pockets. Unlike last three months, trade segment sales witnessed an upsurge in Feb'17 with remonetisation gathering pace and wedding/winter season coming to an end. All-India average cement price improved by 1.4% MoM in Feb'17 with maximum price recovery in Northern and Central regions (in the range of 3 to 5% MoM). Further, on yearly comparison, average price rose by ~2.6% in Feb'17 mainly due to sharp improvement in Northern (+7.5% YoY), Central (+7.4% YoY) & Western (+6.3% YoY) regions. Despite an upward bias of price recovery in several pockets as there are dialogues to hike price by Rs10-15/bag in Mar'17, most dealers do not expect much price recovery mainly on account of: (a) likely price war between the companies in the last month of the fiscal to increase sales volume and (b) persistent demand pressure from IHB segment. Notably, two months average price for 4QFY17E is 2.6% higher compared to average price in 4QFY16.

Key Takeaways

- Having seen a dismal demand environment in Jan'17 marred by festivals and wedding season, demand environment recovered moderately on MoM comparison in Feb'17 on the back of visible pick-up in construction activities.

- Unlike last three months, trade segment sales witnessed an upsurge in Feb'17 with remonetisation gathering pace and wedding/winter season coming to an end.

- All-India average cement price improved by 1.4% MoM in Feb'17 with maximum price recovery in Northern and Central regions (in the range of 3 to 5% MoM).

- Dealers expect March sales would be impacted by Holi due to likely shortage of labours. Despite an upward bias of price recovery in several pockets in Mar'17, most dealers do not expect any significant price recovery due to persistent excess supply and closing month of the fiscal.

- Notably, two months average price for 4QFY17E is 2.6% higher compared to average price in 4QFY16.

Pricing trend in Eastern region continued to remain subdued and does not seem to be reversed in the medium term with excess supply and new entrants. Recent commissioning of Emami's 2MnT SGU at Panagarh (WB) will put further pressure in the region.

Outlook & Valuation

We expect the demand would stage a distinct recovery in FY18E on the back of (a) low base; (b) pick-up in infrastructure activities; (c) likely improvement in rural demand; and (d) likely traction in government's "Housing for All" scheme. We firmly believe that the cement industry is a perfect bet of infrastructure boost and likely revival of rural economy. Further, as we believe that the valuations of large-cap stocks appear to be stretched, we do not expect any meaningful return from these counters. However, we opine that several mid-cap stocks are still available at comfort valuations and trade at huge discount (30-70%) to their large-cap peers. Looking ahead, we expect that likely improvement in return ratios will aid the mid-cap companies to get re-rated. We maintain our positive stance on J.K. Cement, Ramco Cements, Mangalam Cement and HeidelbergCement India.

Source : Equity Bulls

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