October price hike sustains; >5% increase QoQ in Cement sector: IIFL Capital Services

1 Nov 2023 , 10:42 AM

• All India average cement price is up 3.5% MoM or by Rs12 per 50- kg bag in Oct-2023. While prices usually increase post withdrawal of monsoons, this time the hikes have been higher. The could be to factor in – 1) recent fuel price increase – petcoke price is up 25-30% since Jul-23, and 2) any possible demand moderation due to Elections (5 States elections in November – Rajasthan, Madhya Pradesh, Chhattisgarh, Telangana & Mizoram followed by National Elections likely in Apr-May 2024).
• Regionally, price hikes in Oct have been broad based except for the Eastern markets where prices had increased in September. In all prices between August end and now are up 7% or by Rs25/bag at the pan-India level; across regions the price increase ranges from Rs10-50/bag or 3-16%.
• Thus, more importantly, prices in Q3 so far are up 5.6% QoQ or by Rs20/bag at the pan-India level. The increase has been highest in South and East markets ranging 8-9% QoQ; followed by North and West (4-5% each); while prices in Central India are up only 1.5% QoQ. The sharp increase would support profitability of companies with higher South and East exposure, such as Ramco Cements, Dalmia Bharat, India Cements, Nuvoco Cements, Sagar Cement, etc.
• Channel checks suggest so far demand has picked-up in Octber-23 on resumption of construction activity post monsoons. While ongoing State elections and festive season has impacted volumes in some states, overall volumes are likely to grow (partly aided by soft base as last year demand was impacted due to unseasonal rains).
• The sharp price hikes taken in last 2 months would ensure that profitability for the sector would be higher in H2 compared to H1. Further, volume growth is likely to see an uptick with the pick-up in construction activity; however analysts of IIFL Capital Services would closely monitor the impact of elections (labour availability becomes an issue). They continue to maintain their positive stance on the sector and maintain BUY on UltraTech Cement, JK Cement, Dalmia Bharat and JK Lakshmi.