Sector Update | 10 December 2019
All-India prices up 5% YoY in Nov’19
All India retail price INR/50 kg bag
% Chg. YoY
Margins to shrink further, demand remains muted
Lower energy costs cushioning impact of sequential drop in prices
After declining by 2% YoY in 1HFY20, cement demand remains muted at only ~2% YoY
growth in 3QFY20, according to our channel checks. This is due to weak construction
activity from unseasonal rains, low government spending and low housing demand.
All-India cement prices are down by ~3% QoQ in 3QFY20 (+5% YoY) and by 9% from
the peak in May’19. Prices continue trending down in east, south and west, but are up
by ~10% YoY (-1% QoQ) in the north and central regions.
We estimate the sector margin to contract sequentially in 3QFY20, mostly in east and
west, where prices are down by 4-5% QoQ. North and central region margins are likely
to gain support sequentially from better fixed-cost absorption on account of
seasonally higher volumes.
Lower energy cost should cushion (by INR30-50/t) the adverse impact of lower prices,
as both petcoke (-16% YoY) and imported coal (-32% YoY) prices have corrected.
We reiterate our preference for companies with higher exposure to north and central
India. Our top pick is UltraTech among large-caps and JK Cement among mid-caps.
All-India cement prices hurt by decline in west and east
All-India average cement prices have declined by ~3% QoQ in 3QFY20, led by
declines in the eastern, western and southern regions.
Prices are down by ~2% QoQ in south due to a 6% decline in AP/Telangana and
flat prices in other southern states. Demand in AP/Telangana remains weak and
both the attempted hikes of INR 50-70/bag in Sep and Nov’19 failed to sustain.
Prices in west are down 4% QoQ on account of a decline of ~6% QoQ in
Maharashtra (demand impacted by state elections) and 3% QoQ in Gujarat.
Prices in east are also down 4% QoQ due to weak demand and commissioning of
North and central appear relatively well placed with prices down by only 1%
QoQ (and up ~10% YoY). Demand in north has been marginally better (up ~4%
YoY), which along with strong production discipline, has helped sustain prices.
Net margin contraction lowest in central/north, highest in east/west
Assuming no change in per unit fixed cost, players in central and north India
(Shree Cement, UltraTech, JK Cement and Prism Johnson) are likely to see only
INR25-50/t (2-5%) drop in spreads from 2QFY20 levels. Adjusted for lower fixed
costs due to seasonally higher volumes in 3QFY20 (+5% QoQ), these players are
likely to report slightly better EBITDA/t QoQ.
However, players in west, east and south India (Dalmia Bharat, Ramco, India
Cement, ACC and Ambuja) are likely to see a significant INR100-150/t (10-15%)
drop in spreads from 2QFY20 levels due to larger price erosion.
Amit Murarka - Research analyst
(Amit.Murarka@motilaloswal.com) +91 22 7199 2309
Pradnya Ganar - Research analyst
(Pradnya.Ganar@motilaloswal.com); +91 22 6129 1537
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.