Cement - August 4, 2017 - Kotak

Weather-proof? All-India cement prices saw a marginal decline of Rs.3/bag mom in August 2017 holding on to cement prices since June 2017. Cement prices in West were weaker declining by Rs. 10/bag mom, while prices in East recovered by Rs. 9/bag mom, recovering the slippage seen in July 2017. Earnings for 1QFY18 have reflected the strong price increase taken in April 2017, though subsequent price trends suggest a Rs. 6/bag qoq decline for 2QFY18.

All-India cement prices decrease by Rs. 3/bag in Aug 2017; West sees a decline in prices

All India cement prices decreased by Rs. 3/bag mom to Rs. 339/bag in Aug 2017 as prices decreased in the West and North while increased in the East. Prices declined sharply in West (-Rs.10/bag mom) followed by North and South (-Rs. 5/bag mom each). Price in the East bucked the trend and saw an improvement of Rs. 9/bag mom. Dealers appeared less hassled by the shift in taxation regime, a departure from the state of confusion the same time last month.

- North and Central. Cement prices in North declined by Rs. 5/bag while Central prices remained largely unchanged and stand at around Rs. 314/bag and at Rs. 317/bag respectively. Higher price declines were seen in Himachal Pradesh (-Rs. 15/bag mom) and Delhi (-Rs. 10/bag mom) while prices in Rajasthan and Chandigarh declined by Rs. 5/bag mom.

- West. Cement prices in the West showed the sharpest decline by Rs. 10/bag mom and stand at ?321/bag currently (Rs. 325/bag in 4QFY17). In Maharashtra, cement prices declined by as much as Rs. 10-24/bag mom with Nagpur getting hitting a low of Rs. 296/bag. However, cement prices in cities like Ahmedabad and Surat remain strong at Rs. 315/ bag and Rs. 325/bag respectively in August 2017.

- South. Cement prices in South have declined by Rs. 5/bag mom - average prices now stand at Rs. 372/bag. Price decline in AP/Telangana and Karnataka was as much as Rs. 15-27/bag in Aug 2017. Prices in Tamil Nadu and Kerala increased by Rs. 15/bag mom and Rs. 8/bag mom respectively.

- East. Cement prices in East saw an increase of Rs. 9/bag mom in August 2017 neutralizing the price decline of Rs. 10/bag seen in July 2017 bringing average price back to Rs. 350/bag. Price increase was led by West Bengal (+Rs. 25/bag mom) bringing the prices back to an all-time high of Rs. 370 seen in June 2017.

Volume trends not showing much optimism; cost inflation continues

Industry volumes as per DIPP declined 5.8% yoy in June 2017, post an 11.6% yoy decline in 4QFY17. We do highlight that cement volumes have borne the brunt of the dual disruption from currency demonetization and subsequently introduction of GST. We do highlight that companies like ACC (+10% yoy) and Shree Cement (+14% yoy) reported strong volume growth, even though Ultratech (-1% yoy) disappointed in 1QFY18. Volumes aside, cost-side pressures continue with pet-coke prices continuing to increase in the month of May 2017 reaching US$100/ton from US$88/ton in March 2017.

Prices are beginning to cool off, players in North stand to lose more on realizations

Our earnings estimates largely factor the price increase taken in 1QFY18. Valuation multiples for companies such as Ultratech and Shree Cement already factor the positives of the current price increase. We see greater risks to earnings of companies in North India (JK Lakshmi, JK Cement and Shree Cement) as cement prices have continued to trend down since the price increase in April 2017, and will yield weak headline numbers for 2QFY18.

Source : Equity Bulls

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