Subdued prices as focus on volume growth in Indian cement sector: IIFL Capital Services

3 Jul 2023 , 10:18 AM

All-India average cement price is flat MoM in June’23. Regionally, price hikes in North and Central markets (up to 1.5% each) were negated by a sharp decline seen in South (down 3.6%); prices in East and West region remained flat MoM.

• In Q1FY24, all India average cement price is down by Rs2/bag or ~1% QoQ. This is unusual as historically, prices have increased sequentially, given peak construction period in Q1. In last 15 years, average cement price declined only twice in Q1 on QoQ basis (2013 and 2015); otherwise, price hike has ranged between 1-10% QoQ. Falling input prices (petcoke and coal) and focus on market-share gains seems to have resulted in flattish price trend.
• Regionally, prices are down QoQ across regions – with South and North regions witnessing the highest decline. Recommencement of Adani plants in Himachal Pradesh led to higher supplies in Northern region, possibly pressuring prices. Increased competitive intensity amidst new capacity addition and focus on market share could have weighed on prices in Southern market. Prices in East and West are largely flattish QoQ.
• Dealers’ commentary on demand remains robust – though select regions have seen MoM moderation in June’23 after a strong May. Delayed monsoon has also aided volume growth during June-2023. Overall demand is likely to grow in double digits in Q1FY24. IIP data suggest 13.7% YoY production growth over Apr-May’23.
• For FY24, analysts of IIFL Capital Services expect a recovery in industry profitability, on the back of falling fuel prices and sustained volume growth (8-9% YoY). However, pricing is likely to remain weak (as seen in Q1) as companies focus on volumes and market share gains. Concentration of the top-5 players would continue to increase on capacity additions, resulting in these players reporting higher-than-industry volume growth.
• Although there is potential for M&A in the sector, given the high valuation expectation (>US$120/MT), probability is low. Stocks fairly price-in near-term earnings; for further re-rating, clarity on volume growth beyond 12 months is a must. Analysts of IIFL Capital Services preferred picks in the sector are UltraTech Cement, Dalmia Bharat, and JK Lakshmi.