The Indian cement sector continues to see slow demand growth. Overall capacity utilisation touched 70% in FY19, though the key regions of south/north are still below 50%/60%. Industry RoE/RoCE is barely in double-digits. Ten-year price CAGR was just 2.7% until last year. The sector took a large price hike of Rs 50-70 per bag (15-20%) in Feb-Mar-2019 in the face of weak demand and low capacity utilisation. This helped the sector report strong profitability in 1QFY20. Our channel checks and demand outlook suggest that a large part of this may be difficult to sustain and thus earnings could come under pressure.. We build 4-5% price growth and 0% demand growth in this FY.
Demand—several drivers losing momentum: Overall demand growth is likely to be weak as several underlying drivers seem to be losing momentum, such as (1) rural demand—weak rural income growth and peaking of Pradhan Mantri Awas Yojana—Gramin (PMAY-G) scheme, (2) infrastructure—slowing spend growth, (3) urban housing—still in inventory correction mode, and (4) industrial investment—has again lost momentum.
Large EPS cuts may continue: The trend of EPS cuts may continue as demand disappoints versus expectations. Upside can originate from (1) stronger government and private spending, (2) price discipline, and (3) weak commodities. We initiate coverage on Ultratech (Underperform, TP Rs 3,400), ACC (Neutral, TP Rs 1,500), and Ambuja (Neutral, Rs 195) with a cautious view.