Long wait for pricing recovery

Cement demand has seen a healthy traction in April across most markets, barring the northern region, but an industry up-cycle is still far away in the rivalry-riven sector.

A Pan-India channel check in 60 cities, done by Centrum Broking, shows sand availability, and consequently cement sales, has improved across Maharashtra, Bihar and Tamil Nadu though it continues to be an issue affecting the industry in Rajasthan. But cement offtake has been good across eastern, western and southern regions.

Cement prices have seen an average 2 per cent month-on-month price increase pan-India during April, led by an 8 per cent rebound in the western region. The southern region saw price increases of 1 to 2 per cent but prices fell by 1 per cent in the north. Centrum says realisations in north and south are down 2-3 per cent compared to the FY18 average while it is up by a modest 1-2 per cent in other markets.

The cement industry will require further price hikes to offset the steady increase in fuel and diesel prices.

Analysts Rajesh Kumar Ravi and Vinay Menon of Centrum says, “We remain positive on the cement sector, and expect the demand buoyancy to drive price recovery across markets. Thus, the industry should be able to mitigate the cost headwinds (rising coal and diesel prices).”

However, an Emkay Global report says rising competition among cement companies to gain market share and add capacities may prolong a price recovery in the sector by 18 to 24 months.

Emkay Global points out that the cement companies’ “urge to gain market share has put pressure on cement prices” even in the peak month of March,. at the lowest point of the year. “In the last 15 years, the cement industry has never seen March-end pricing being at the lowest ebb of the fiscal year,” the brokerage said.

It says the cement industry is expected to commission an estimated 52 million tonne capacities between FY19 and FY21. This apart, acquisition of stressed assets of  about 10 mtpa capacity would also lead to incremental supply in the market during FY19-20.

“Capacity utilisation of the industry is expected to remain sub-75 per cent till FY21E based on our demand growth estimates of 7-8 per cent. Clinker utilisation too will reach to 86 per cent only in FY21E and hence, pricing power is not expected to improve significantly.”

“Cement companies’ focus on capacity additions and fight for market share gain make us believe that the industry up-cycle is still 1.5-2 years away,” says the Emkay Global report.

The Centrum analysts say their top pick among cement companies are UltraTech Cement, for its strong volume growth visibility for the next two-three years along with the efficient cost structure, and Star Cement for its leadership presence in the lucrative north-eastern region and strong return ratios. They also favour JK Cement for its steady white cement business, improving grey cement profits and balance sheet de-leveraging play.

Emkay Global, on its part, says Grasim Industries and Star Cement are the only conviction Buys for it, while it continues to prefer UltraTech, Shree Cement and JK Cement.