Street hopeful of a better future driven by pricing gains
Cementstockshavetakena significantbeatinginaseasonally softquarteraffectedbymonsoon. Realisationshaveremainedsubdued, whilecostpressurescontinue unabated. ThestartofOctober, toohas notseensignificantuptickinprices withKotakInstitutionalEquities’ channelcheckssuggestingthatall Indiacementpricesaredowninthe currentmonthby~ 2per50kgbag comparedtoSeptemberaspricing weaknesscontinuedinFY19.
Thepressureonthecostfront, howevercontinuestorise. Analystssay, costpressuresmaycontinuefor cementcompanieswithspotrupeeto dollarratedownfivepercentcompared totheaveragerupeerateof70.1in Septemberquarter. Sincecost pressureshurtwithalagandgiven closeto35percentofthecostsareat paritytodollar, thesemayweighon profitabilityinthenearterm.
Yet, analystsareoptimistic. This optimismstemsfrom expectations thatcementrealisationswillcatchup soon. Recently, IndiaRatings maintainedastableoutlookoncement manufacturersfortheremainderof FY19, drivenbyahealthygrowth forecastacrossend-marketssuchas affordablehousing, roadsand irrigationsector, whichwouldhelpin sustainingstrongvolumes.
East, CentralandSouthregionsare
leadingthegrowthbackedbyhigher governmentspendingon infrastructure(roadsandirrigation) andaffordablehousing, andrural housingdemand. AnalystsatICICI Securitiessay,“Demandgrowthcould surpriseforsecondyearinarowwith13 percentgrowthinH1FY19, after posting9percentgrowthinFY18.” Theyhavefactoredina10percent demandgrowthforFY19and6.5per centforFY20-FY21.
Withstrongdemand, analystsfeel thatrealisationswillalsocatchup gradually. Sofarthiscalendaryear, realisationshavenotpickedupas cementmakerswerelookingtoexpand
intonewerregions/markets. Also, about25milliontonnesofacquired capacitieswerebeingrampedup, and thusrisingsupplieskeptatabonprices whichremainedsubduedrelativeto demandgrowth. But, allthismay changeascapacityutilisationsand demandimproves.
UltraTech, whichhascontinued growingitscapacities, isbestplacedto takebenefitsofthecementupcycleand isamongsttoppicksofmost brokerages. Italreadycommandsa23 percentmarketshare, sayanalystsat MotilalOswalSecuritieswhoalsolike ShreeCementgivensuperior execution.
Meanwhile, ACCandAmbuja Cements, whichhaveshown improvementintheirpertonne profitabilityinpastfewquarters, can seestrongupgradesifthetrend continues. DalmiaBharat’searnings growthisalsoexpectedtobesuperior comparedtoindustry, ledby acquisitionsandoperatingleverage.
Overall, analystsatICICISecurities saytherecentunderperformanceof stocksadequatelyfactorsina pessimisticscenarioofflatoperating profitpertonneovernextfewyears. Theyadd, theearningsdowngrade cycleisexpectedtobottom-outwith Q2FY19results.