Cement: Outlook may remain weak for 3-4 quarters

Dealer checks and management meetings recently undertaken by brokerages indicate the current trends in cement demand and prices across a majority of markets in the country remain weak. In fact, things could remain subdued for quite some time.

“Our discussions with dealers across cities suggest continued weakness in demand still persists due to subdued government investment, poor housing demand and a poor monsoon hurting rural demand,” said Mihir Jhaveri and Siddharth Vora of Religare Institutional Research. Consequently, prices across markets and regions have fallen between Rs 10 and Rs 30 a 50-kg bag, compared to November, with northern India seeing the biggest decline. Weak demand from Punjab and Haryana agri markets and subdued construction activity are key reasons.

Excess supply in Rajasthan have, in fact, forced players to push sales in the nearby western market of Gujarat. While east India has also seen higher price declines, the southern markets have seen the least, as no new entities have entered the fray and disrupted the factors in recent months.

The reason for South India prices declining by a lesser margin is the better pricing discipline among producers. Since most of them are laden with debt, the companies seem to realise the need to maintain pricing discipline. However, “prices in north India have been fairly volatile. They were cut sharply during April-July, followed by steep hikes over August-September and cut again during November-December, to previous lows,” said Nitin Bhasin and Achint Bhagat, analysts at Ambit Capital, in a recent note.

At the current price (Rs 180-200 a bag), the larger companies’ ratio of operating earnings  a tonne are low and the smaller ones are making losses, they said.  

Going ahead, prices could remain subdued – flat to some decline in the near term, with only a few markets seeing some uptick. Analysts at Ambit say  the outlook is weak for at least three to four quarters.

“Meetings with senior professionals did little to change our bleak FY16/17 outlook for the industry,” they say. Among key factors that point to a weak demand environment is rural stress, which along with weak construction activity is likely to keep volume growth muted for three to four quarters. There is also another story waiting to unfold, which could have a significant bearing on demand. “The impact of crackdown in organised residential real estate construction in the urban cities is yet to hit the bottom, since multiple projects are still under implementation. High unsold inventory, stagnating land prices and low liquidity due to a clamp on black money will curtail future investments by developers in organised real estate, which could affect demand growth after completion of the under-construction projects,” the analysts said.

As a result, the market will have to tone down its growth expectations for FY17. This means analysts could lower their earnings estimate, which could hurt sentiment more.

For investors, the advice from Ambit’s analysts is: “Cement is indeed a credible play on infra recovery in India but as the magnitude of demand recovery is uncertain, we opine that investors should be averse to paying expensive valuations for hopeful growth.” While they have a sell rating on Ambuja Cements, trading at $135/tonne, it appears to have the lowest downside. Among smaller companies, they are bullish on Orient Cement.

While the consensus is bullish on cement stocks, the smaller ones could see a higher upside, going by target prices of analysts polled by Bloomberg. For the bigger ones, the upside is mostly seen in single digits. But, if indeed the demand recovery takes a longer time to pick up, share prices of cement companies could see pressure, as they’ve outperformed the S&P BSE Sensex by a good margin in the past one year.