Price declines MoM & QoQ; Q1 trend deviates in cement sector: IIFL Securities

21 Mar 2024 , 05:46 PM

All-India average cement price is marginally down by Rs2/bag, or 0.7% MoM, in May’23. Regionally, East saw the highest decline (2.1% MoM), followed by North and Central regions (both down 1% MoM). Prices in West are flat; while South is the only region where prices are up 1% MoM (price hikes seen in Telangana and Kerala markets).

• Even on quarterly basis, all India average cement price is down by Rs2-3/bag or 0.7% QoQ in Q1FY24 QTD. This is unusual as prices typically rise during the peak construction period. In the last 15 years, average cement price has declined only twice in Q1 on a QoQ basis (2013 and 2015); otherwise the increase has ranged between 1-10% QoQ. This time, the flattish price trend is the result of falling input prices (petcoke and coal) and focus on market share.
• Regionally, on a quarterly basis, prices are down all across – North and Central have seen the largest decline. Although most dealers expect prices to go up only post-monsoon, some believe there could be one hike in mid-June to withstand any weakness during the monsoon. Management commentary on price hikes is largely in sync with analysts of IIFL Securities dealer checks.
• Overall commentary on demand remains robust, based on dealer’s assessment – demand has improved MoM in May’23. Demand in the beginning of the quarter was impacted by unseasonal rains (largely in North and Gujarat), but has picked up since then. Traction in Infrastructure projects, coupled with strong Housing demand (new launches are up) is likely to aid 8-9% demand growth in FY24. Major players in the Cement space are likely to grow faster than the industry, given the ramp-up in new capacities.
• Although visibility on price increase is low, strong demand growth and fuel price tailwinds are likely to drive industry’s profitability (analysts of IIFL Securities estimate their coverage Ebitda to grow by 37% in FY24). Although the sector is trading at reasonable valuations and may consolidate in near term as we enter a lean period, from a medium-term perspective our top picks are UltraTech Cement, Dalmia Bharat, and JK Lakshmi.