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The share prices of many large and small cement companies have seen a strong run up on the bourses in the last few months in anticipation of strong demand.
For instance, Shree Cement is up 23 per cent, Ambuja Cement is up 13.5 per cent, JK Cement has gained 15 per cent and UltraTech, the pan-India leader, has surged 22 per cent since the start of December 2014.
However, at the ground level, the demand and realisation pick up has not been as strong as anticipated earlier. The price hikes taken by players at the start of January 2015 have not sustained as demand remains soft. In this backdrop, concerns have cropped up over the near-term prospects of the cement companies. As a result, stocks of larger players have seen marginal decline, while smaller companies have seen sharper losses in the last few days.
Nevertheless, analysts expect demand to improve in a few months’ time. Traditionally, the June quarter is the strongest and analysts also expect the pace of infrastructure development to pick up post the June quarter.
Analysts at Prabhudas Lilladher in their February 18 note say they remain confident on cement demand improvement from Q2 of FY16 onwards on the back of higher Budget allocation to the infrastructure sector, pick-up in housing demand aided by lower interest rates and thirdly, a revival of the investment cycle with the series of policy initiatives undertaken by the government.
North India-based cement players though remain better placed as there is limited capacity additions compared to south India which already has excess capacities. Thus, capacity utilisation for North-based players is likely to remain much higher than compared to South-based producers despite. Hence, the gains for the former are estimated to be larger despite the Southern manufacturers sustaining better pricing discipline. In this backdrop, any correction should be seen as an opportunity to buy the stocks of north-based cement companies (see table) with a medium to long term investment horizon.
While cement manufacturers in the north hiked prices in January by Rs 15-40 per 50 kg bag, in February they have had to reverse about two-third of the price hikes.
Central India, too, did not see the price hikes of Rs 10 a bag being sustained. With pricing discipline in south, west, too, has been able to see stable prices.
Though south Indian manufacturers maintain pricing discipline, volumes are likely to remain low and excess capacities are seen putting pressure on capacity utilisations in the near-term, thereby keeping margins under check.
Capacity utilisation
Analysts at India Ratings and Research, a Fitch group company, see cement capacity utilisation in the southern region improving to 61-63 per cent in FY16 from 56 per cent in FY14.
However, even then, the utilisation levels will be amongst the lowest in all regions. In eastern India, they see reduction in capacity utilisations to around 70-71 per cent in FY16 from 75 per cent in FY14 due to capacity expansions (17 million tonnes per annum) exceeding demand.
Positively, in the western region the capacity utilisations are likely to remain stable at 73 per cent, with additions in line with demand. It is the central (85 per cent utilisation versus 81 per cent in FY14) and northern regions (81 per cent versus 78 per cent) which are estimated to see good improvement and highest utilisation levels. Higher utilisation levels will help companies score better on the margin front.
Thus, north-based players with exposure to Northern, Central and Western India are likely to continue outperforming.
These include Shree Cement, Ambuja Cements, JK Lakshmi Cement, Mangalam Cement and JK Cement, apart from UltraTech, that remain top picks of analysts. Large cap players as Shree Cement and Ambuja, though, seem fairly priced are however best placed to gain from a demand recovery. JK Lakshmi and Mangalam Cement remain the picks in analysts polled by Bloomberg and their valuations too are very reasonable.
