Sector Update | 9 January 2020
Cement
Price hikes in 4 quarter have
been very frequent
Number of instances of price
hikes in last 25 years
18 18 19
16 16
13
12
11 11
10 9
th
That time of the year again
Seasonality in prices starting to play out with hikes made this week
8
Our analysis of cement price movement over the past 25 years shows strong
seasonality with prices rising by 7% on average in first half of a calendar year but
declining by 2% in second half. We believe this is because volumes tend to be stronger
in first half, but are impacted by monsoon and festive holidays (Diwali, etc.) in other
half, leading a slowdown in construction activity.
January this year has also started on a positive note as prices have increased by
~INR10/bag (3%) in most parts of the country (according to our channel checks) after
declining by ~INR30/bag (9%) in the last six months. While some of these hikes may
get rolled back in the next few weeks, we expect the industry to continue attempting
prices hikes over the next few months as demand has been improving seasonally (i.e.
month on month) as expected.
Moreover, industry will have cost tailwind in the March quarter due to lower petcoke
price and operating leverage gains from seasonally higher volumes, which should be
further supportive of margins.
Our sensitivity analysis indicates 3-7% upgrade in EBITDA for our cement universe for
every 1% increase in price. Companies lower down the cost curve (ACC, Ambuja, India
Cement, etc.) benefit more at 5-7% from a hike given their weaker EBITDA profile.
Shree Cement accordingly benefits the least at 3%.
New year kick starts with hikes of INR10/bag across regions
The first week of Jan’20 witnessed INR10/bag of hikes across regions. All-India
cement prices are up by 9% YoY, with an increase of 13-15% YoY in north and
central India and 3-4% YoY in east and west.
While prices remained steady to INR10/bag higher in most regions of south,
Hyderabad has witnessed a hike of INR40/bag. Notably, prices in Hyderabad had
declined sharply by INR65/bag in Oct-Dec’19. Given weak demand in
AP/Telangana, we would not rule out a rollback of the hike – something which
happened in both Sept and November when hikes failed. Prices in south are
currently higher by 9% YoY including these hikes.
Our channel checks also suggest that there has been a seasonal pickup in
cement demand from Dec’19 which should be supportive of price hikes. On a
YoY basis, however, demand remains only marginally positive.
We have built in 3-5% increase in prices in 4Q for our cement universe.
Our pricing database of the last 25 years shows that price hikes tend to be
highest in the March quarter – 20 out of the past 25 years have seen sequential
price increases with an average increase of 5%.
Current prices are still lower by 6% from Apr-May’19 levels when price hikes of
INR50-60/bag were initiated in most parts of the country. Most of the decline
has been in east, west and south, while north and central India have fared
better given tighter capacity utilization there.
History suggests maximum price hikes in March quarter
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.