Sector Update | 10 December 2019
Cement
All-India prices up 5% YoY in Nov’19
All India retail price INR/50 kg bag
% Chg. YoY
390
28%
330
270
210
150
14%
0%
-14%
-28%
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
new capacities.
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.
 Motilal Oswal Financial Services
Sector Update
Petcoke prices fall; imported coal prices up MoM
Domestic petcoke prices are down by 23% since Apr’19. Prices were down by
INR860/t (11%MoM) in Nov’19 itself; average petcoke price for 3QFY20 is lower
by 16% YoY.
However, imported coal prices have been on a rise since Oct’19. Prices were up
by 7% MoM in Oct’19 and by 6% MoM in Nov’19. However, on a YoY basis,
average coal prices are down by 32% for 3QFY20 due to declines in 1HCY19.
Costs to decline by ~INR100/t QoQ led by lower fuel cost/higher volumes
The sharp decline in petcoke prices is likely to result in INR30-50/t or 4-6% QoQ
decrease in fuel costs in 3QFY20. There should be an additional INR25-40/t
reduction in 4QFY20 as companies keep 2-3 months of fuel inventory, which will
delay the full absorption of lower petcoke cost in 3QFY20. Companies
dependent on imported coal (India Cement, Orient Cement, etc.), however, will
likely have much lower fuel benefit of INR10-15/t as coal prices have risen QoQ.
Power & freight cost though has been largely stable QoQ.
There should also be INR50-70/t QoQ savings from better fixed-cost absorption
in 3QFY20 as volumes are seasonally higher by ~5% QoQ. Moreover, seasonal
maintenance shutdown costs are also lower in this quarter.
Valuation and view
Cement demand recovery will be slow and gradual in our view and we expect only
1% growth in FY20. Prices in North and Central regions should continue to perform
better given that they have the best utilization outlook (>80%) even in a limited
demand growth environment. We prefer companies that have higher exposure to
these regions, are moving down the cost curve and provide valuation comfort.
UltraTech therefore is our top large-cap pick and JK Cement is our top mid-cap pick.
Exhibit 1:
Cement - Valuation summary
CMP
ACC
ACEM
UTCEM
SRCM
BCORP
DALBHARA
ICEM
JKCE
JKLC
TRCL
ORCMNT
PRISM
SNGI
1,437
196
4,039
20,128
608
829
73
1,154
272
769
70
62
36
Mcap
3.8
5.5
16.4
10.2
0.7
2.2
0.3
1.3
0.5
2.6
0.2
0.4
0.1
(INR) (USD b)
RECO
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
Buy
Neutral
Buy
Buy
Buy
TP
(INR)
1,900
220
5,050
815
1,020
80
1,370
425
750
105
100
60
10.1
5.9
8.2
12.2
5.8
2.9
1.3
11.3
5.3
12.1
4.6
14.5
3.2
RoE (%)
12.7
6.6
11.7
15.1
9.6
3
2.6
16
14
14.1
9.9
9.8
5.7
12.4
6.3
13.8
18
10.3
4.4
3.2
15
15.5
14.2
9.9
11.3
3.7
26.9
21
44.7
62.1
18.3
52.5
32.4
33.8
40.2
35.2
30.2
19.8
17.6
P/E (x)
19.2
17.8
28.1
45.4
10.5
50.3
16.3
19.3
14.2
27
13.1
26.9
9.4
17.5
17.9
21.3
33.2
8.9
33.3
12.9
17.9
11.2
23.6
12.1
21.5
13.5
EV/EBITDA (x)
11.5
11.2
18.6
25.5
7.7
9.5
8.2
11.5
9.7
18.6
8.3
7.4
6.9
9
9.3
12.9
18.6
4.7
8
6.9
9.4
6.2
15.1
5.8
7.4
4.2
7.5
8.7
10.9
15.7
4
6.8
6.2
8
5
13.3
5.2
6.7
6
101
102
165
269
68
100
47
109
46
161
46
84
EV/Ton(x)
94
96
156
231
60
98
47
96
43
137
42
86
88
90
149
209
52
79
47
92
39
142
39
87
FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E
Neutral 21,000
37
32
42
Source: Company, MOFSL
10 December 2019
2
 Motilal Oswal Financial Services
Sector Update
Story in charts
Exhibit 2:
All-India prices up 5% YoY in Nov’19
All India retail price INR/ 50 kg bag
390
330
270
210
150
% Change YoY (RHS)
28%
14%
0%
-14%
-28%
470
390
310
230
150
Exhibit 3:
Prices in north up 11% YoY in Nov’19
North retail price INR/ 50 kg bag
% Change YoY (RHS)
40%
20%
0%
-20%
-40%
Exhibit 4:
Prices in central India up 10% YoY in Nov’19
Central retail price INR/ 50 kg bag
390
330
270
210
150
% Change YoY (RHS)
30%
15%
0%
-15%
-30%
Exhibit 5:
Prices in west up 2% YoY in Nov’19
West retail price INR/ 50 kg bag
390
330
270
210
150
% Change YoY (RHS)
50%
25%
0%
-25%
-50%
Source: MOFSL
Source: MOFSL
Exhibit 6:
Prices in south up 4% YoY in Nov’19
South retail price INR/ 50 kg bag
470
390
310
230
150
% Change YoY (RHS)
60%
30%
0%
-30%
-60%
Exhibit 7:
Prices in east flat YoY in Nov’19
East retail price INR/ 50 kg bag
390
330
270
210
150
% Change YoY (RHS)
60%
40%
20%
0%
-20%
Source: MOFSL
Source: MOFSL
10 December 2019
3
 Motilal Oswal Financial Services
Sector Update
Exhibit 8:
Retail petcoke prices down 11% MoM in Nov’19
Retail petcoke prices (INR/tonne)
15%
8%
13%
6%
1%
6%
2%
YoY growth (%)
Exhibit 9:
Imported coal prices (FOB) up 8% MoM in Nov’19
Imported coal price/ t in INR (LHS)
42%
26%
25% 13%
4% -1%
YoY growth (%)
-5%
-13% -15% -13% -16%
-16% -28%
-22%
-39%
-27%
-40%
-38%
-38%
-39%
Source: Industry
Source: Bloomberg
Exhibit 10:
Diesel prices down 1% MoM in Nov’19
26%
19%
7%
1%
3%
3%
Diesel price (INR/ltr)
YoY growth in Diesel prices
1%
-2%
-6%
66.1
-3%
-6%
67.8
-11%
68.1
-10%
69.0
-6%
68.2
76.7
72.8
66.6
66.6
68.5
68.9
68.6
68.4
68.7
Source: Industry
Exhibit 11:
Quarterly trend in petcoke and coal prices
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20
Retail petcoke prices (INR/ton)
Imported coal prices (Richards Bay 6,000kcal) (INR/ton)
9,150
6,416
9,480
7,075
9,183
6,907
8,950
6,037
9,224
4,647
8,221
4,265
7,713
4,769
YoY
-16%
-31%
QoQ
-6%
12%
Source: Industry, Bloomberg
Exhibit 12:
Petcoke to lower fuel cost by INR60/t QoQ
Calorific value of petcoke
Kcals/ ton of clinker
Decrease in cost/ ton of petcoke
Decrease in cost/ton of clinker
Blending ratio
Decrease in P&F cost/ton of cement*
Unit
kcal
kcal
INR/ton
INR/ton
x
INR/ton
Value
7,500
750
838
84
1.4
60
Exhibit 13:
Imported coal to reduce fuel cost by INR10/t QoQ
Calorific value of imported coal
Kcals/ ton of clinker
Decrease in cost/ ton of imported coal
Decrease in cost/ton of clinker
Blending ratio
Decrease in cost/ton of cement*
Unit
kcal
kcal
INR/ton
INR/ton
x
INR/ton
Value
6,000
750
87
11
1.4
8
Source: MOFSL, Company* Assuming 100% petcoke as fuel
Source: MOFSL, Company *Assuming 100%imported coal as fuel
10 December 2019
4
 Motilal Oswal Financial Services
Sector Update
Exhibit 14:
Lower petcoke price to result in INR30-50/t QoQ savings in power & fuel (P&F) cost
Companies
ACC
ACEM
UTCEM
SRCM
DBEL
ICEM
JKCE
JKLC
RAMCO
ORNTCMT
PRISM
Imported coal in fuel
mix (%)
6
13
16
40
0
86
13
25
38
84
20
Impact
(INR/t) on P&F cost
0
1
1
3
0
7
1
2
3
7
2
Petcoke in
fuel mix (%)
65
58
71
60
60
14
75
75
62
8
60
Impact
Total impact(INR/t)
(INR/t) on P&F cost
on P&F cost
39
37
35
33
43
47
36
36
36
30
8
16
45
46
45
47
37
43
5
12
36
40
Source: MOFSL, Company
Exhibit 15:
Merchant power tariffs have been relatively stable
IEX avg. price - INR/kWh
4.1
5.9
3.6
2.9
Source: IEX
Exhibit 16:
Companies with exposure to east, west and south to see margin contraction sequentially in 3QFY20
Companies
ACC
ACEM
UTCEM
SRCM
DBEL
ICEM
JKCE
JKLC
RAMCO
ORCMNT
PRISM
Total impact (INR/t)
on P&F cost
37
33
47
36
30
16
46
47
43
12
40
2QFY20 EBITDA/t
(INR/t)
864
841
1,026
1,453
1,063
552
1,135
722
977
432
614
Change in realizations Net impact on spreads
QoQ (INR/t)*
(INR/t)
(138)
(101)
(154)
(121)
(124)
(77)
(109)
(73)
(162)
(132)
(127)
(111)
(69)
(23)
(126)
(79)
(146)
(103)
(156)
(144)
(77)
(37)
Source: MOFSL, Company,* based on our channel checks and regional sales mix
10 December 2019
5
 Motilal Oswal Financial Services
Sector Update
NOTES
10 December 2019
6
 Motilal Oswal Financial Services
Sector Update
Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
< - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30
days take appropriate measures to make the recommendation consistent with the investment rating legend.
Disclosures
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Motilal Oswal Financial Services Ltd. (MOFSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOFSL, the Research Entity (RE) as defined in the Regulations,
is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial products. MOFSL is a subsidiary
company of Passionate Investment Management Pvt. Ltd.. (PIMPL). MOFSL is a listed public company, the details in respect of which are available on www.motilaloswal.com. MOFSL
(erstwhile Motilal Oswal Securities Limited - MOSL) is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock Exchange of
India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Multi Commodity Exchange of India Limited (MCX) and National Commodity & Derivatives Exchange Limited (NCDEX) for its
stock broking activities & is Depository participant with Central Depository Services Limited (CDSL) National Securities Depository Limited (NSDL),NERL, COMRIS and CCRL and is member
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products.
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the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a
market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of
interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific recommendations made by the
analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even though there might exist an inherent conflict of interest in
some of the stocks mentioned in the research report
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Research Analyst views on Subject Company may vary based on Fundamental research and
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and therefore it can have an independent view with regards to Subject Company for which Research Team have expressed their views.
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The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered
broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading
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Specific Disclosures
1 MOSL, Research Analyst and/or his relatives does not have financial interest in the subject company, as they do not have equity holdings in the subject company.
2 MOSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company
3 MOSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months
4 MOSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report
5 Research Analyst has not served as director/officer/employee in the subject company
6 MOSL has not acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
7 MOSL has not received compensation for investment banking/ merchant banking/brokerage services from the subject company in the past 12 months
8 MOSL has not received compensation for other than investment banking/merchant banking/brokerage services from the subject company in the past 12 months
9 MOSL has not received any compensation or other benefits from third party in connection with the research report
10 MOSL has not engaged in market making activity for the subject company
********************************************************************************************************************************
The associates of MOFSL may have:
-
financial interest in the subject company
-
actual/beneficial ownership of 1% or more securities in the subject company
-
received compensation/other benefits from the subject company in the past 12 months
10 December 2019
7
 Motilal Oswal Financial Services
Sector Update
other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific
recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even though there
might exist an inherent conflict of interest in some of the stocks mentioned in the research report.
-
acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
-
be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies)
discussed herein or act as an advisor or lender/borrower to such company(ies)
-
received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.
The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report
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demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income from clients which are not
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may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at
an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to
determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures,
options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied,
is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is
provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The
Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and
the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform
or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a
separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is
already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the
views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or
published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any
locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOFSL to any registration or
licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose
possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall be
liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees to exempt MOFSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not
to hold MOFSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses,
costs, damages,
expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263; Website
www.motilaloswal.com.CIN no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad(West), Mumbai-
400 064. Tel No: 022 7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412. AMFI:
ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration
No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond,
NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a group company of MOFSL. Private Equity is offered
through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL. Research & Advisory services is backed by proper research. Please read the Risk
Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in securities market is subject to market risk,
read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law
Tribunal, Mumbai Bench.
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