Cement stocks: Volumes are trailing estimates, risk-reward is favourable

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Updated: September 16, 2019 6:49:47 AM

Dealers across most regions suggest companies are attempting a Rs 10-15/bag hike from mid-Sep’19 (Rs 40-50/bag in AP) mainly to avoid further fall in prices.

Cement, Cement sector, SRCM, UTCEM, TRCLWe believe risk-reward is favourable as valuations have corrected by ~15% recently on concerns of lower volumes.

Our channel checks suggest industry volumes likely declined in high-single digit y-o-y in Aug’19 impacted by heavy rains across most regions especially in West and East and lower government spending. Volumes likely declined in low-single digit y-o-y during Jul-Aug’19 (combined for better comparison owing to variability in monsoon) similar to that observed in Q1FY20. Dealers across most regions suggest companies are attempting a Rs 10-15/bag hike from mid-Sep’19 (Rs 40-50/bag in AP) mainly to avoid further fall in prices. While volume growth is trending below our estimates, better prices and lower costs offset the impact on overall Ebitda. We believe risk-reward is favourable as valuations have corrected by ~15% recently on concerns of lower volumes. SRCM, UTCEM and TRCL remain our top picks.

– Demand in North and Central regions during Jul-Aug’19 remained broadly flat y-o-y on heavy monsoon and weak government spending. Average prices declined 1-2% m-o-m and are up sharply by 13% y-o-y in North and 7% in Central regions owing to high utilisation.

– South region volumes during Jul-Aug’19 remained broadly flat y-o-y as volume declined in Andhra Pradesh/Telangana on high base and change of government in Andhra Pradesh offset by demand improvement in Tamil Nadu and Kerala. Average prices declined further by 2-3% m-o-m and are now flat y-o-y in Aug’19. The AP government unveiled a new sand mining policy in the first week of Sep’19.

– Volumes in West region during Jul-Aug’19 likely declined by mid-single digit as strong demand in Maharashtra led by pre-election state spending got more than offset by weak demand in Gujarat due to rains. Average prices likely declined 3-4% m-o-m in Maharashtra with marginal price decline in Gujarat in Aug’19.

– Demand in East region during Jul-Aug’19 likely declined in mid-single digit y-o-y due to floods in Bihar and Jharkhand and muted government spending across most other states in East. Prices corrected ~3% m-o-m and are now flat y-o-y.

Average pan-India prices still up 4% y-o-y in Aug’19

However, they declined 2% m-o-m. Volume growth may remain muted till Oct’19 owing to delayed monsoon and early festive season and growth may pick up from Nov’19 on higher government spends and better rural housing demand. Besides, benefit of >20% decline in coal/petcoke prices since Mar’19-end would also flow through the rest of FY20e. Overall, consensus FY20-21e Ebitda has been upgraded 9-10% over the past four months and the same is unlikely to be downgraded. We maintain our positive view as industry clinker utilisation is expected to cross 80% in FY21e enabling Ebitda-accretive price increases.

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