Strong double-digit volume growth in South India helped maintain respectability of earnings for cement players in Q3FY17, as the region benefitted from improved demand and a favourable base. Price increases taken in Q4FY16 continue to aid strong head-line realisation growth (y-o-y) for North-based players, even as a 5% q-o-q decline in realisations implies a declining profit trend. Weak price trends, impact of rising fuel cost and an unfavourable volume base point to a weaker Q4FY17 for cement players.
Resilient dispatch numbers, aided by low base in South: Cement companies reported flat volumes at 37 million tons in Q3FY17, though weak volume growth by pan-India players (-6% y-o-y) was offset by strong 21% y-o-y growth in cement volumes by players in South India. Cement players in South benefitted from (i) low-base effect on account of floods in Chennai last year, (ii) improved institutional demand in Andhra Pradesh/Telangana, and (iii) lower impact of de-monetisation on account of better banking system in South.
ACC and Ambuja were the laggards with 9% y-o-y decline in cement volumes, even as Ultratech reported a more resilient 2% y-o-y decline in cement volumes. Dalmia Bharat (+36%), India Cement (+22%) and Orient Cement (+19%) reported strong volume growth, owing to their presence in South India markets.
Profitability declines 11% q-o-q: Profitability of cement companies declined 11% q-o-q to R753/ton—still a 10% y-o-y improvement from last year, though meaningfully lower than the profitability of R970/ton reported in Q1FY17. The drop in profitability over the past three quarters can be attributed to higher production cost. Realisations have remained largely rangebound and came in at R4,464/ton (+1% y-o-y, -1.7% q-o-q) in Q3FY17.
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Price trends and input costs point to a weaker Q4FY17: Current price trends suggest that all-India prices will settle at
R319/bag in Q4FY17—down R7/bag q-o-q, though still up R15/bag y-o-y. However, on the cost-side the full impact of the increase in pet-coke prices will hit earnings in Q4FY17.
Stocks have re-traced over the past month, though earnings risk remains high: Large cap stocks have re-bounded by 5-10% over the past month reflecting a potential normalisation in demand. We highlight that our earnings estimates do carry a downside risk on account of weak price trends and continued cost pressures.