THE SMART INVESTOR:
Volume concerns recede, realisation gains key for cementmakers
UltraTech and Shree Cement are top picks in a sector grappling with higher capacities.
The lifting of a stay on construction by the Supreme Court in Uttarakhand and Maharashtra should come as a relief for cement makers. Experts feel that Madhya Pradesh, which has been affected by the ban on construction activities, may also get relief as the state government submits its compliance report on adherence to solid waste management rules.
Maharashtra has remained a major cause of concern, being a key state for real estate as well as infrastructure spend. This is because 57 per cent of top six cities’ real estate demand and 10 per cent of the overall cement demand are accounted for the state, believe analysts. Thus, a ban in Maharashtra that consumes about 30 million tonnes of cement per annum would have hurt volume growth, especially in an environment of weak realisations.
It has been the volume boost that has kept revenue momentum steady. This coupled with cost-efficiency measures are helping them tide over the sharp rise in fuel and logistics costs. The June quarter saw the sector witness volume growth of about 15 per cent yearon-year while per tonne profitability declined by 21 per cent year-onyear, according to analysts at Deutsche Bank Research.
While volume growth concerns are likely to reduce, it is the muted realisations which will limit the upsides for cement stocks. Analysts say that channel checks in the first week of September indicated that demand continues to be good though realisations were impacted by the ongoing monsoon season which is typically a weak one for cement companies.
All-India average cement price corrected by 1 per cent month-on-month (~2-3/bag), mainly led by 3 per cent monthon-month price correction in eastern and central regions, respectively, followed by 1 per cent price correction each in northern and western regions.
Analysts say while demand momentum will continue with growth expected to be at 8-9 per cent during FY19, the improvement in realisations may only follow gradually. With cement makers looking to expand into newer regions/markets, and 25 million tonne of acquired capacities also being ramped, prices would remain subdued relative to demand growth in FY19, believes Prasad Koparkar, senior director at Crisil Research.
Prospects over the long-term, however, remain intact given the demand-supply dynamics, believe analysts. Binod Modi, analyst at Reliance Securities, says that incremental demand will be higher than incremental supply over the next three years, which is expected to aid price recovery. Modi is hopeful on some price recovery post the end of monsoon season and start of the festive season.
Brokerages remain positive on UltraTech and Shree Cement given the strong volume growth outlook. Analysts at JP Morgan Research say that even though valuations for the two may not be cheap, earnings revisions cycle have not yet bottomed out. Both companies have continued to ramp up their capacities and volume growth remains strong.
ACC Ambuja that had reported strong profitability turnaround in the June quarter is also well-placed to reap the gains if current margin trends continue. The new capacity addition visibility for these two players however is limited.
Among others, Dalmia Bharat remains the top pick of Deutsche Bank who also sees gains for Grasim which is holding company of UltraTech. Grasim has seen holding company discounts widen of late. JK Cement, JK Lakshmi Cement and Orient Cement are other picks amongst regional players.
Analysts remain cautious on south India players as the region has witnessed higher supply. Crisil Research indicated that demand-supply imbalance would be the most pronounced in south India because 18 million tonnes of capacity is coming up over the next two fiscals there, or 2.5 times the expected incremental demand.