No price hikes in November by Cement companies; East doing better: IIFL Capital Services

7 Dec 2022 , 11:17 AM

• All-India average cement price is flat MoM in November 2022. However, prices have seen marginal improvement across all regions (ranging from 1% to 2.5% MoM), barring South (down 4.7% MoM). In southern region, after a sharp increase seen in October, players seemed to have been focusing on pushing higher volumes, resulting in price decline in the current month.
• For Q3 so far, all-India prices are up 4%, or by Rs14/bag, over Q2 average price. Regionally, markets in East and South have seen the highest increase (+11% and +7% respectively); North and Central are the weakest (flattish trend), while West markets have seen marginal increase. The current trend should benefit players like Dalmia Bharat, Nuvoco Vista, JK Lakshmi and Ramco Cements.
• In December 2022, companies have further increased prices — all-India prices are up by Rs2/bag, or 0.6% versus November-exit prices. The increase is seen in North, South and West markets (ranging from 1-1.5%); East and Central markets witnessed marginal decline. Dealers suggest that although ACC and Ambuja have extended their year-ending to March, annual targets for dealers for incentive computation may still be considered as December. Thus, there could be some pricing pressure by month-end.
• On demand, IIFL Capital Services’ channel checks suggest volumes have seen MoM improvement (October was weak due to festivity + extended monsoons), but recovery has been lower than initial expectations. On a YoY basis, November would see a double-digit growth, though this is partly because demand was very weak in November last year (especially in the eastern region). As such, dealers expect overall demand to show positive trend going ahead, since the peak construction period has started for the industry.
• Based on the trends so far (cement prices up; fuel prices flat QoQ, but with higher volumes, operating leverage would kick in), analysts at IIFL Capital Services expect EBITDA per ton of the sector to improve by Rs250-300/t to Rs850-900/t in Q3. Although post the recent run-up in the sector, valuations are not cheap, any meaningful correction in fuel prices could lead to positive surprises and earnings upgrade.

Analysts at IIFL Capital Services remain positive on the cement sector and maintain Buy on UltraTech Cement, ACC, JK Cement, Dalmia Bharat, and JK Lakshmi.