Cement: Prices up in July amid subdued volumes

4 Aug 2023 , 11:49 AM

• All-India average Cement price is up by 1% or Rs4/bag in July’23. Regionally, the highest price increase is seen in North (+3.2%) followed by Central (+2.4%) and East (+0.8%) markets. Prices in South and West markets remain flat MoM. 
• Compared to Q1 average – all-India average price is up 1% QoQ in July; as price hikes in North and Central markets are partially negated by softness in Southern markets (-2.2% QoQ); while prices in West and East remain flat QoQ. Prices in Q2 usually decline QoQ due to seasonal weakness. 
• Per channel checks, dealers are surprised by price increases, given the subdued volumes; hence doubt the sustainability of such prices hikes. However, analysts of IIFL Capital Services think, there is a possibility that prices can remain flat QoQ as cement prices had not increased in Q1, which generally do, and fuel prices have seen some increase in recent days (putting pressure on Cement companies to increase prices). 
• Dealers’ commentary suggests a moderation in demand in Q2 across regions with the pickup in monsoons. Further, dealers are not confident of demand pickup in the near term and believe the momentum will pick up from Sept’23 onwards. However, demand from infrastructure projects could support the overall demand growth.
• In Q1FY24, based on the companies that have reported so far, volume growth has been very strong. However, Ebitda/t improvement has been subdued due to weak-to-flattish realisation and more gradual decline in power and fuel costs. Another visible trend is of market consolidation, with top 4-5 players growing faster than the market at the expense of small and regional players. Analysts of IIFL Capital Services believe this trend would continue, given the ability of large players to service the market from multiple locations. Further falling fuel prices would also aid Ebitda/t recovery in H2FY24. 
• The current valuations seem to be pricing in near-term earnings and the stock may consolidate at current levels; however, given the strong demand momentum, analysts of IIFL Capital Services maintain their positive bias on the sector from medium-to-long term perspective. Their picks in the sector are UltraTech Cement, Dalmia Bharat, JK Cement and JK Lakshmi.