Cement: Cooling off - Kotak

Cooling off. All-India cement prices saw a decline of Rs6/bag mom in June 2017, eroding some of the gains seen in the preceding two months. While West retained most of its price increases, North and Central have given up a large part of the increases taken at the start of the quarter. 1QFY18 will see realizations improve by Rs400/ton compared to the same period last year for pan-India players, though higher production cost through increase in pet-coke prices will constrain the improvement in profitability.

All-India cement prices decrease by Rs6/bag in June 2017; West holds on to gains

All India cement prices decreased by Rs6/bag mom to Rs343/bag in June 2017 as prices decreased in the North, Central and South. Price decreases were strongest in the South (-Rs12/bag mom) followed by North and Central region (-Rs8-10/bag mom) even as East saw some moderation (+Rs3/bag mom). On a quarterly basis, West will see the maximum improvement in cement prices (+Rs42/bag qoq) followed by South (+Rs28/bag qoq) and trailed by North and Central (+Rs23/bag qoq).

- North and Central. Cement prices in North and Central decreased by Rs8-10/bag mom each and stand at around Rs320/bag currently compared to Rs314/bag in March 2017, retracing most of the gains due to the price increase in April 2017. Higher price declines were seen in Uttar Pradesh, Delhi, Haryana and Rajasthan (-Rs10-15/bag mom) while prices in Punjab and Jammu & Kashmir decreased by Rs2-5/bag mom.

- West. Cement prices in the West improved by Rs2/bag mom and stand at Rs335/bag currently (Rs307/bag in 4QFY17). In Gujarat, cement prices increased by as much as Rs20-30/bag mom. Cement prices in cities like Surat and Baroda stand at all-time high of Rs320/ bag and Rs310/bag, respectively, in June 2017.

- South. Cement prices in South have declined by Rs12/bag mom - average prices now stand at Rs368/bag (highest amongst all regions). The decline in prices was led by AP/Telangana (-Rs25/bag mom) and Kerala (-Rs15/bag mom) each. However, the prices in Karnataka and Tamilnadu remained largely constant, with Tamilnadu showing a decline of Rs5/bag mom, reducing prices to Rs375/bag (Rs380 in May 2017) in June 2017.

- East. Cement prices in East saw improvement of Rs3/bag mom in June 2017, aided by price increases in West Bengal (Rs20/bag mom) leading to an all-time high of Rs370 in June 2017. However, prices in Odisha declined by Rs20/bag mom and now stand at Rs340/bag.

Reported volumes at disconnect with aggregate industry data; cost inflation continues. Industry volumes as per DIPP declined 3.7% yoy in April 2017, post an 11.6% yoy decline in 4QFY17. Industry data appears to be at disconnect with the modest volume growth reported by the larger players for 4QFY17. Pet-coke prices have continued to increase in the month of April 2017, reaching US$94/ton from US$88/ton in March 2017.

Price increase in 1QFY18 gives credibility to earnings forecasts, valuations factoring the positives

Our earnings estimates largely factor the price increase taken in 1QFY18. The strong pricing action across regions, gives early credibility to earnings forecast that have been susceptible to large downgrades in the past. Valuation multiples for companies such as Ultratech and Shree Cement already factor in the positives of the current prices increase while even ignoring the earnings dilution on account of a large acquisition in the case of Ultratech. Orient Cement in our coverage universe benefits most from the price increases in 1QFY18, owing to the company's large exposure in Maharashtra (47% of sales).

Source : Equity Bulls

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