Cement: Expect recovery in demand growth in H2

Published: October 9, 2019 12:26:55 AM

While cement prices have largely declined in the non-trade segment in the northern region, trade segment prices continue to rule higher, with discipline moderately holding in the region.

Demand too was sluggish across regions for September; we attribute this to the extended monsoon for the current year.Demand too was sluggish across regions for September; we attribute this to the extended monsoon for the current year.

By IIFL Institutional Equities

Cement price average for the month of September was volatile, primarily with southern prices increasing at the start of the month by up to Rs. 40 per 50-kg. bag (~15%) as a result of improvement in discipline and declining by a largely similar amount by the end of the month due to weak demand. Prices in other regions were mostly stable.

Demand too was sluggish across regions for September; we attribute this to the extended monsoon for the current year. Based on market whispers, we estimate a year-on-year decline of ~2% for the industry for September; for H1FY20, we estimate 1- 2% y-o-y decline for the industry.

All-India average price for end-September was up 2% y-o-y and flat m-o-m; current prices are largely in line with our expectations. Cement demand has turned out to be lower than our conservative estimate for H1FY20.

We expect a recovery in demand growth in H2FY20, with likely improvement in the rural segment post a very good monsoon; however, cement prices may turn volatile, given the increasing capacity additions, including the largely resilient northern region. We maintain our medium-term negative stance on the sector, given lack of upcycle visibility/high valuations and expect it to continue its under-performance going forward due to increasing negative news flow.

While cement prices have largely declined in the non-trade segment in the northern region, trade segment prices continue to rule higher, with discipline moderately holding in the region. Demand is weak in the region, except for poll-bound states, as per dealers. We expect pricing volatility to return in the region in the next few months, as two major capacities have commenced operations in the last 3-4 months; the total addition by these two new clinker capacities are close to 6mtpa, which is ~10% of the region’s capacity and, if demand is not growing at close to 10% at the time of stabilisation of these capacities, fight for market share is likely to re-emerge.

End-September price range was Rs. 260-350 per 50-kg bag in New Delhi, Rs. 250-315 in Jaipur, and Rs. 290-340 in Ludhiana.

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