North Indian cement players set to outperform South peers

Shree, JK, JK Lakshmi, UltraTech top picks of analysts, who believe these companies will benefit from better demand

Cement companies have seen a strong performance on the bourses, as hope of economic revival caught pace. North-based entities and pan-India ones with strong exposure to the north have done better than south-based companies. Better realisations, higher volume growth and stronger demand recovery expectations led to this.

Moving forward, too, the gains for North India players are likely to remain larger. In fact, the valuation gap between North Indian and South Indian entities is likely to widen, say analysts. This is due to better capacity utilisation, lower capacity addition, strong demand and possible consolidation in the region.

Chirag Shah at Barclays says the top five – UltraTech, Shree Cement, Ambuja, Jaiprakash and ACC – command 63 per cent of capacity in the region versus 48 per cent for India overall. The rising entry barriers, greater consolidation and higher utilisation levels should lead to higher pricing power for the north-based producers, says Shah, who also believes the north is the most attractive regional market.

Prices in the north remained strong in February and March due to shutdown of Binani’s capacities. These had corrected marginally in May, after Binani's resumption. However, given the pre-monsoon price increases, average realisations in the June quarter were stable. At Rs 295 a 50-kg bag, these were much better than Rs 282 a bag.

For the quarter ending June, Ravi Sodah at Elara Capital says, “We expect cement companies with a higher exposure to North and West India (JK, JK Lakshmi and Ambuja) to report year-on-year improvement in earnings. However, South-based companies (India Cements and Orient) are likely to continue to post a decline in earnings, as prices were subdued for most of the quarter.”

Shree and UltraTech will also gain from the higher prices in the north. This also explains the outperformance seen by north-based companies, although, led by some price rises in the south after Telangana's formation, the South Indian manufacturers also saw some upside on the bourses.

  With these developments, the north-based entities have also got higher upward earning revisions. In the June quarter results preview by Motilal Oswal Securities, the highest upwards revisions in earnings per share (EPS) were for JK and Shree Cement. JK's EPS estimates for FY15 and FY16 were revised upwards by 20 per cent and 22.5 per cent, respectively. For UltraTech and Shree, which have the highest triple-digit EPS (Rs 133 and Rs 433.1), they saw a 10.9 per cent and 28 per cent upward revision, respectively, for FY16. For the latter, JK Lakshmi Cement saw a 38.7 per cent increase to Rs 17.1.

There could be some improvement in demand in South India but analysts do not anticipate a major increase in their capacity utilisation. Demand is also likely to be higher in the north, leading to better use of capacity. Chirag Shah expects strong infrastructure demand, led by the Delhi-Mumbai Industrial Corridor, the (railways') Dedicated Freight Corridor and housing projects in the north helping regional entities report 80 per cent capacity utilisation by FY17 (currently 70-72 per cent).

The northern region is also likely to see lower capacity additions, due to higher entry barriers. Also, the limited limestone availability here, compared to South India, checks this. Increasing freight costs are a limiting factor for excess supply from South India reaching other regions.