Cement sector: Muted Q1; trend likely to continue in near-term

12 May 2023 , 10:02 AM

 

• All-India average Cement price in Q1FY24 QTD is flat sequentially. Analysts at IIFL Capital Services note that the price decline seen in March-end is reversed in April; but thereafter, prices have largely remained flat. Unseasonal rains in North, slowdown in construction activity in Central market due to harvest season have also weighed on demand and prices.

 

• Cement prices are down across all regions, ranging from 0.3% to 1% sequentially, except for East – where prices are up 1% QoQ. In South, companies have increased prices in Telangana and Kerala markets by Rs. 10-15/bag in May 2023; but sustainability of the same is not clear. In North, recommencement of Ambuja-ACC plants in Himachal Pradesh may also have weighed on prices (down Rs. 5-10/bag).

 

• This ties up well with the commentary of Cement companies, which have said that there has been no significant price change in Q1 so far. In fact, some companies believe that price increase would now happen only post monsoons. Near-term earnings would be supported by softening fuel cost (companies shared that spot petcoke prices are down to US%135-140/t versus US$185-190/t in H2FY23).

 

• Cement demand for the third consecutive year is likely to remain healthy – Cement companies expect industry volumes to grow by 7-9% YoY in FY24. Strong new launches in Housing segment, and thrust by the government to increase momentum in infrastructure projects (in a pre-election year) — is likely to aid volume growth.

 

• In their base case – analysts at IIFL Capital Services expect FY24 blended realization to grow by 1% YoY. But given the likely tailwind from the energy prices, expect sector EBITDA to improve by 30% YoY from Rs. 850/t to Rs. 1,100/t. Expect volume growth to be in line with industry (around 9-10%), resulting in strong earnings growth. Any significant price correction owing to increasing competition intensity, could risk IIFL’s estimates.

 

• As strong earnings recovery is priced-in, analysts at IIFL Capital Services prefer stocks that offer high earnings visibility or trade at relatively inexpensive valuations. Their preferred picks in the sector are UltraTech Cement, Dalmia Bharat, JK Cement and JK Lakshmi.