Cement players on verge of growth; price hike to sustain

After years of consolidation, the cement industry is in for strong growth. It is expected that an incremental demand will be higher than an incremental supply over next three years and the companies are unlikely to cut prices any further and would rather be able to sustain the recent prices that took place in the last few months, feel analysts.
With strong improvement in demand scenario leading to demand growth of 7% in FY18 and sustained demand growth in FY19 at 10%, we expect demand to moderate with 6% growth in FY20E despite all tailwinds in place to boost cement requirement. The demand is expected to remain healthy over the next 3 years.

“Given the sharp pricing recovery since February 2019, we believe cement companies are likely to report super operating performance in the current quarter. Considering the kind of realisation growth recently, a moderate decline in prices due to monsoon season might not impact pricing meaningfully,” said an analysis done by Reliance Securities.

“We are hopeful that recent price recovery should sustain hereon on account of sustained demand momentum and rising utilisation of the industry. However, with washout demand scenario in 1QFY20 so far, pick-up in government spending would be crucial to support growth. Notably, incremental demand from proposed ‘Housing for All’ scheme and construction activities of metro/irrigation projects are likely to aid utilisation and profitability of the industry in the long term. We further believe that incremental demand will be higher than incremental supply over the next 3 years, which is expected to aid pricing sustainability,” an analyst with Reliance Securities pointed out.

According to Motilal Oswal, across India, cement players hiked prices by Rs 20 per bag in April, followed by another hike of Rs 30 per bag in May, which was partly rolled back towards end of May. Pan-India, current prices are Rs 25 per bag higher than the average prices witnessed in 4QFY19. Prices have increased (as against 4QFY19 average prices) by Rs 40 per bag in the north, Rs 6 per bag in the south, Rs 37 per bag in central India, Rs 23 per bag in the east and by Rs 26 per bag in the west. Further, we have observed that the price hikes are more prominent in markets (the north and central India) that have seen substantial consolidation in the last few years.

“We are currently factoring in Rs 7-8 per bag increase in realisation for FY20-21. Should the current price hikes sustain, it will lead to an earnings upgrade of over 25% for large-cap companies and over 50% upgrade for mid-cap companies (given higher sensitivity to realisation).

“Also, valuations seem almost in line with LPA for large-cap companies and at substantial discount for others,” an analysis of Motilal Oswal pointed out.

It further said that on the cost front, prices of imported coal have reduced by 20% from 4QFY19 average. Diesel prices have increased by 1% over 4QFY19 average following the rally in crude prices. However, crude price decline in the last week of May should bode well for the cost curve of companies, in case prices sustain.Post industry consolidation of the last few years, we believe the cement industry is now on the verge of growth. This in turn should lead to higher prices, enabling significant upgrade in earnings estimate. Also, demand uptick in 2HFY20 will be critical for sustainability of prices and for upgrades to take place, Motilal Oswal said further.

According to Reliance Securities, all-India average cement price in trade segment hovered at Rs 330-335/bag (+11.6% YoY and +0.4% MoM) at the end of May, mainly led by continued price improvement in northern (+1.6% MoM) and central (+1.5% MoM) regions. Further, the prices in other regions continued to remain steady despite roll back of the price hikes undertaken in the first week of the month in several pockets. We further note that there are higher incentives and different schemes being offered by the companies to dealers/distributors (in Rs 10-15/bag range) mainly to jack up sales volume. However, there is no indication from the companies to reduce prices as of now despite soft demand, it added.

“While it is difficult to predict about any price decline during monsoon (i.e. last year monsoon, only Rs12/bag price decline), we believe the companies are unlikely to cut prices sharply this monsoon also. Given the companies cut prices by Rs 10-15/bag in the current monsoon, cement prices will continue to trade at higher side. Hence, the cement companies are likely to report stronger QoQ and YoY operating performance despite soft volume. Further, benign cost environment should also aid performances of the cement companies,” the Reliance Securities analysis further said.