Pressure on cement companies amid price recovery delay due to higher supply

Analysts cautious on sector given the inadequate profit triggers

Recovery in cement realisations continues to elude the sector, even in December, with hopes of a meaningful improvement now carried forward to 2019. While there was optimism that cement prices may recover at the end of the festive season (Dussehra and Diwali), this was not the case as there was no improvement in prices for the fifth month in a row.  

The reason for the pressure on prices is higher supply — driven by cement majors trying to gain market share, ongoing brownfield expansions, and increasing utilisation of acquired capacities. On a regional basis, while South India has a higher proportion of new capacities on account of availability of sandstone, it also remains weakest link within the various regions. 

Central and North India have been a mixed bag, with the recent assembly elections impacting price recovery, say analysts. Though West and East India remained better placed, analysts say there is not much hope of an all-India average price recovery in December, given the annual closing for some companies.

The same is reflected in stock prices with UltraTech, ACC, Ambuja Cements and Shree Cement trading 13-20 per cent lower than their highs at the beginning of the year. Going ahead, analysts remain cautious over near-term prospects. Analysts at Prabhudas Lilladher Securities believe the industry will continue to lack pricing power, as the demand mainly emanates from low margin as well as the intensely competitive non-trade segment. Some analysts feel the continuing and announced capacity additions by companies eyeing future demand will put further pressure on pricing. 

Pricing improvement holds key for any potential earnings upgrades in the near term, say analysts at UBS Securities who see current stock valuations at above the 10-year average. 

The only silver lining for cement majors is that volume growth, which has remained strong in 2018 supported by strong demand, is likely to continue. 

YES Securities expects cement demand in India to grow 7.6 per cent from 297 MT to 370 MT over FY18-21. Analysts at UBS see 6 per cent annual volume growth during FY18-21, which is higher than the 3 per cent growth registered during FY15-18.

The recent softening of crude oil prices along with new axle norms will ease the logistics costs which, coupled with lower coal and petcoke prices, provide some respite on the profitability front.