Street calm despite dip in cement prices

Analysts see buying opportunity on strong demand outlook

Cement prices, as anticipated, continued to decline in August, with the monsoon impacting construction. However, analysts are not reading much into this. In fact, they say any correction in stock prices of companies such as UltraTech Cement, Shree Cement, Ambuja Cements, ACC, Dalmia Bharat and others offer a buying opportunity for investors, given the expected increase in cement demand.

Although the all-India average price of a 50-kg bag fell by one to four per cent in August as compared to July, the average across regions is down four to five per cent in this quarter over the earlier one. Goods and services tax (GST) implementation led to the effective rate coming down from about 31 per cent to 28 per cent; companies would have passed on the two to three per cent benefit to customers, it is felt.

Importantly, the expected boost in demand during the second half (October-March) of this financial year is likely to lead to volume and realisation gains. Analysts at Morgan Stanley say demand recovery is on and geographically broad-based, while the capacity pipeline is unlikely to be higher than expected. Higher utilisation will drive expansion in per-tonne operating earnings and return on equity from multi-year lows, as the brokerage sees the longest ever upcycle for the industry.

All this supports a stock valuation premium versus the historical level. The government’s effort on affordable housing and infrastructure are bound to push up demand, while a good monsoon and agricultural produce boost rural demand. Further, volume growth will look better, given the low base of last year, which was impacted by the note ban. The GST-led destocking impact is also behind, say analysts.

Among the regions, South India is seeing the biggest pricing impact (see table). However, Kotak Institutional Equities’ channel check suggests prices increased in Andhra-Telangana by Rs 15/bag month-on-month, while Karnataka saw no change, maintaining Rs 370/bag this month. Thus, recovery is in the offing. Also, south-based manufacturers as India Cements cater to other regions and can partially offset the impact of lower prices by selling cement in the latter. Notably, prices in the south are still the best among all regions.

While East and West India saw a one per cent to 4.2 per cent month-on-month decline in prices, it is up in the West by 9.5 per cent year-on-year. The latter is good news for Ambuja and even Orient Cement, which had benefited on substantial supplies to the region during the June quarter. Other pan-India players will also benefit to that extent.

In the east, though pricing is a bit soft, demand is expected to improve. Analysts at Morgan Stanley say that demand continues to be strong there and a visible rise has also been seen in the north and south in the past couple of months.

Thus, Shree Cements, which benefited from rising sales in East India during the June quarter, might continue to see higher volumes.

Demand in the north, Shree's key market, remains healthy. Further, ACC and JK Lakshmi Cement have added fresh capacity in the east and stand to benefit.

On the whole, the average realisation for many might be lower in the September quarter but a sharp fall is unlikely.

Binod Modi at Reliance Securities does not expect any sharp fall in September quarter earnings over the June one due to a price correction, as the two to three per cent dip in the latter can be accounted as passing on the benefit of lower GST rates.

Companies are seen benefiting from lower cost as well, which could lend support. Analysts at Kotak Institutional Equities feel the modest decline in petcoke prices, as well as waiver of the busy-season surcharge for railway freight, coupled with decline in diesel prices, could offer some relief. Year-on-year, though, rising fuel costs might still impact per-tonne profitability. For now, the price trend for September is being watched.