Cement Sector Update - Healthy pricing amid weak demand - HDFC Securities

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities.
Cement (Update): Healthy pricing amid weak demand

The Indian cement industry fared better than expected in May 2020. While Covid lockdown hit April sales hard (down 80% YoY), May sales appears to be down only 20% YoY, as per our channel checks. Demand from the rural/semi-urban regions drove trade sales in May to fall at lower pace YoY. Labour and capital shortage hit non-trade sales harder. Better than expected trade demand kept cement prices buoyant across markets. YTD-1QFY21 prices are up 4-31% YoY! Falling petcoke/coal/diesel prices will continue to cushion margins amid weak demand.

Demand trend in May 2020: While Covid lockdown led to ~80% YoY fall in cement demand in April, the contraction was much lower in May (vs expectations at start of the month). As per our channel checks, overall sales declined ~10-15% in north/central/east regions, while it fell 20-30% in west and south regions. Faster traction in rural/semi-urban cement demand (before monsoon hits), came to the rescue for the industry while labour/liquidity shortage have led to sharp fall in non-trade sales. In fact, pent-up retail demand from the preceding two months helped May sales. Labourers availability has increased sharply in east/central regions as they migrated back from across various parts of the country.

Healthy pricing in May driving up 1QFY21 trend: The sharp price hike taken in late April sustained in May 2020, with a positive trend across east (+4% MoM) and +2% in west/central regions. North/south prices cooled off 1/3% MoM. On YoY basis, north/central prices firmed up 5/3% while it spiked up 12% YoY in south. East and west prices still remained down by 2/1% resp. Amid weak demand, sustenance of price hikes has bolstered 1QFY21 (YTD) pricing up 8/6/9/4% YoY across north/central/east/west markets and by 31% in south.

Energy costs continue to remain low: Owing to global slowdown for fuel demand, prices for coal/petcoke continue to decline. In 1QFY21, imported coal/petcoke prices are down ~10/25% YoY and RIL's petcoke price is down ~21% YoY. Even, avg diesel price in 1Q is trending marginally lower by ~2% YoY/QoQ.

Near term outlook: Sales contraction is expected to continue in June, too, driven by continued sharp decline in non-trade segment. Demand is coming mainly from on-going projects. In our view, cement prices have peaked out in Apr/May and should cool off in subsequent months as demand picks up. Robust pricing so far and lower input costs YoY should moderate earnings decline on account of volume loss in 1HFY21.

Source : Equity Bulls

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