Cement:Prices remain soft - Kotak

Prices remain soft. All-India cement prices saw a decline of Rs6/bag mom in September 2017. Cement prices in West continued to decline (Rs12/bag mom) and are down to levels seen in April 2017, while prices in Central were most stable (-Rs2/bag mom). Earnings for 1QFY18 have reflected the strong price increase taken in April 2017, though subsequent price trends suggest Rs6/bag qoq decline for 2QFY18. Modest volumes and declining price trends suggest that 2QFY18 will not help carry forward the earnings momentum seen in 1QFY18.

All-India cement prices decrease by Rs6/bag in Sep 2017; West sees a decline in prices

All India cement prices decreased by Rs6/bag mom to Rs333/bag in September 2017 as prices decreased pan-India. Prices declined sharply in West (-Rs12/bag mom) followed by North and South (-Rs6/bag mom each). Prices in East, which saw an increase of Rs9/mom in August 2017, too suffered the same fate and saw a decline of Rs8/bag mom in September 2017. We note that there may be an increase in prices for institutional sales, as the new GST regime favors freight sales than the ex-factory sale prices that were common practice previously.

North and Central. Cement prices in North declined by Rs6/bag mom and prices in Central declined by Rs2/bag mom and stand at around Rs308/bag and at Rs315/bag respectively. Higher price declines were seen in Haryana (-Rs12/bag mom) and Delhi (-Rs10/bag mom) while prices in Himachal Pradesh increased by Rs20/bag mom.

West. Cement prices in the West showed the sharpest decline of Rs12/bag mom for a second consecutive month (-Rs10/bag mom in August 2017) and stand at Rs309/bag currently. Price decline in West was across states with Gujarat seeing the highest price decline (-Rs13/bag mom) followed by Maharashtra (-Rs12/bag mom). In Maharashtra, Nagpur saw the highest decline of Rs25/bag mom while prices in Mumbai stood steady at Rs350/bag.

South. Cement prices in South have declined by Rs6/bag mom - average prices now stand at Rs365/bag. Prices in Tamil Nadu and Kerala decreased by Rs30/bag mom and Rs20/bag mom respectively. However, prices increased in AP/Telangana by Rs15/bag mom while Karnataka saw no change, maintaining Rs370/bag price in September 2017.

East. Cement prices in East saw a decline of Rs9/bag mom in September 2017 neutralizing the price increase of Rs9/bag seen in August 2017 bringing average price back to April 2017 level of Rs341/bag. Price decrease was led by Odisha (-Rs30/bag mom) and Assam (-Rs10/bag mom) in September 2017.

Volume trends not showing much optimism; pet coke prices stabilize

Industry volumes as per DIPP declined 2.7% yoy in July 2017, post a 3.9% yoy decline in 1QFY18. We do highlight that cement volumes have borne the brunt of the dual disruption from currency demonetization and subsequently introduction of GST. Modest decline in pet-coke prices as well as waiver of busy-season surcharge for railway freight coupled with decline in diesel prices may offer some cost-side relief.

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

Valuation multiples for companies such as Ultratech and Shree Cement already factor the positives from current price trends—even as we see downside risk to earnings from weak volume trajectory.

Source : Equity Bulls

Keywords