The winter chill seems to have extended to cement prices as evidenced in our latest channel checks—all-India average prices have dipped 2.5% q-o-q in Q3FY18. Despite coming out of a seasonally weak monsoon quarter (Q2FY18) and impact of rise in fuel cost, continued weakness in prices indicate poor underlying demand. Volume growth may however appear high due to low base
(DeMon). While prices should recover post Makar Sankranti (mid-January 2018 onwards marks onset of busy construction season), current weakness, potential impact of sand shortage on demand recovery in various states and looming threat of further hike in fuel cost cloud our FY18/19e earnings. We stay cautious on the sector in near term.
All-India price drop of 2.5% in Q3FY18 q-o-q implies weak demand
Cement prices failed to recover in Q3FY18 despite coming out of a seasonally weak monsoon quarter (Q2FY18). In fact, prices have dipped 2.5% q-o-q, indicating weak underlying demand. Volume growth for companies in Q3FY18 may however appear high given low base of DeMon last year.
Sand woes grip Rajasthan
The Supreme Court-imposed ban on major sand mines in Rajasthan (in November, 2017) is believed to have impacted December, 2017 cement demand by 15-25% in the state. Despite Binani Cement (a player with 7% market share in North) operating at very low utilisation of 20-25% and impact of fuel cost hike (related to pet coke ban), current cement prices in the state have slipped back, giving away most of the gains realised post the pet coke ban announcement. Extended demand weakness in major cluster of northern region (Rajasthan) may have wider implications, given that companies may move higher volumes to nearby states, compromising prices.
Regional price trends: West worst hit; Central sees improvement
We estimate Q3FY18 cement prices for north to dip 1% q-o-q and east by 2%. Western region is likely to be worst hit with an estimated price fall of 8% followed by south, where prices may drop 3-4%. Gradual improvement in sand availability in Uttar Pradesh and Madhya Pradesh has helped cement prices gain by 3% q-o-q in Central India, the only region to witness q-o-q growth.
Outlook and valuations: Winter haze, near term caution
Weakness in cement prices and demand in Q3FY18, overhang of sand shortage on demand recovery and further escalation in fuel cost in near term (owing to potential measures to curb pet coke usage) pose potential risk to our FY18/19e earnings. As we revisit our numbers, we remain cautious on the sector in near term in the absence of positive triggers.