Cement demand was down 1% YTD till October and we do not see signs of demand recovery in 2HFY20E against market expectations of 5-6% growth.
Price correction continues in absence of demand. Our dealer checks suggest that cement prices continue to slide in December 2019 in the absence of demand recovery. All India cement prices are down Rs 6/bag or 2% m-o-m in December, notwithstanding any of the price hike attempts. Cement demand was down 1% YTD till October and we do not see signs of demand recovery in 2HFY20E against market expectations of 5-6% growth. Margins are unlikely to recover in 3QFY20E as price correction will offset cost deflation. Remain cautious on the sector with ‘Sell’ on UTCEM and SRCM.
Our dealer checks suggest that all-India cement prices declined 2% m-o-m to Rs 331/bag in December 2019 continuing the 1% m-o-m fall in November. December would be the seventh consecutive month of price correction after peak prices in May 2019. We note that the current cement prices are down 10% from May 2019 peak whereas 3QFY20E prices are expected to decline 3% q-o-q on a pan-India basis. Our dealer checks indicate further risks to price cuts as non-trade segment has seen sharper price cuts than trade due to weak demand during the quarter.
Price cuts in December were across all regions. The pace of price correction in the markets of north, central was similar to that of east, west and south. Regional prices fell from Rs 5-6/bag across most regions led by west. From 3QFY2020E perspective, west, south, east and central markets are most impacted with prices down -4% qoq followed by North (-1% qoq).
Our checks with cement companies and dealers suggest that demand continues to remain muted and is the biggest concern area in the medium term. Demand pickup in November was temporary with volume pressure returning in December. Intense winters, delays in various government projects and tight liquidity is restricting demand growth. As per DIPP, demand declined by 8% y-o-y in October and we do not expect any significant improvement in the near term. Given the fiscal challenges of the government and slowdown in the economy, we see FY2020E to end with no demand growth against market expectations of 5-6% y-o-y demand growth in 2HFY20E.