Cement firms to see best fourth quarter performance in recent times
Weak realisations will be mitigated by strong volume growth and lower costs helping companies sustain profitability
Cement stocks have been buzzing with activity on the bourses of late. While large-cap stocks such as ACC, Ambuja Cements, Shree Cement and UltraTech continue gaining traction trading near their 52-week highs, many others in the mid-cap and small cap space too are hitting 52-week highs.After a subdued demand and realisation environment in most parts of India during the last few quarters, optimism started setting in as the Union Budget was tabled. The government outlay to infrastructure sector and rural economy all bode well leading to expectations that demand will improve.
While infrastructure sector accounts for nearly 40% of cement consumption, there are expectations that retail demand led by recovery in rural economy may also improve thereby driving growth in days to come. The benefits are to accrue from second half of FY17 post monsoon season.
Though these may be medium-term expectations, there are some green shoots visible too. The growth in North India, which saw very sluggish demand and realisations during last few quarters, has shown positive signs. The better demand in the North was supported by price recovery; similar was the case in West and Central India.
Analysts at Kotak Securities say that the sharp price increase taken in March in North has sustained so far, which makes them revisit their pricing assumptions for North-centric players such as JK Cement, JK Lakshmi and Shree Cement. They thus have revised upwards their target price for the stocks.
Among regions, South India was seeing relatively firm realisations led by production discipline. However, within South India states, Andhra Pradesh and Telangana have seen weakest demand and realisations. But, this too is seen changing for the better. Given the commitments by the Andhra Pradesh and Telangana state governments (while presenting their budgets), demand for cement in south India, particularly the two states, should get a boost. And this has been cheered by the street. This bodes well for India Cements, which has seen its stock surge from lows of Rs 67.50 in end-February to Rs 91.90 levels now.
Many producers as Orient Cement, while manufacturing cement in Telangana and supplying to West India too, are likely to be beneficiary of demand uptick in both regions.
Orient has added capacities in Karnataka and will benefit from the same as will Sagar Cements that may see volume growth of 15% in FY17, as per analysts at Motilal Oswal Securities, led by acquisitions of BMM Cement in August 2015. Sagar Cements has seen highs of Rs 604 on 11 April and trades at Rs 569 levels now.
Players as Dalmia Bharat having presence in North East and South India may see larger benefits led by increased road project in North East.
Thus, most cement manufacturers are well placed to reap benefits. However, the March quarter results while expected to be better than December’15 quarter numbers, may not fully reflect benefits of improved realisations as most price increase has come in March month.
Analysts at Credit Suisse say that March’16 quarter should be a weak one due to delayed price recovery in North only towards end-of-the-quarter. As a result, average selling prices (ASPs) for cement companies will likely be down 6-8% year-on-year. However, the same is likely to be mitigated by strong volume growth.
Analysts at Emkay Research say that amongst large companies, Shree Cement, Ambuja, ACC and UltraTech are expected to report volume growth of 9-29% year-on-year.
Amongst mid-sized players they expect Orient and JK Lakshmi and JK Cement to report volume growth of 13-41% and Prism Cement is the only company where they expect volume decline of 8.2%, on a year-on-year basis.
Notably, at the operating level, lower pet coke and coal prices should bode well for the companies. Analysts at Reliance Securities believe that Q4’FY16 would be the best quarter for cement industry in terms of lower operating costs as industry’s operating cost per tonne will witness a decline of three% year-on-year. While pet coke prices have started increasing off-late, realisations too are firming up.
Source: Business standard