Cement players with focus on North and Central India remain better placed

Cement prices have shown some improvement of late. After a sequential decline in all-India cement prices during first three quarters of FY20, the ongoing quarter is showing a positive trend. The price hikes seen in most regions have sustained, except for South India which still remains the weak link. 
 
Elara Capital's channel checks suggest that average all-India cement prices are up by 2.4 per cent in the current quarter till now (January-February) over the December quarter. Most regions show cement prices per 50 kg bag to have improved by 0.7-5.0 per cent, while average prices in South India are still down 0.4 per cent.

 
What’s encouraging is that more price hikes are being anticipated. Analysts see price hike of Rs 5-15 per 50 kg bag across pockets in East, West and Central India during March. Central and Northern regions had already maintained lead in per bag cement prices (Rs 339-354) compared to other regions (Rs 307-337). Thus, players with focus on North and Central India remain better placed.
 

Though East India is also seeing significant price hikes, which should benefit players in the near term from the region, looking at the ongoing capacity expansions analysts remain cautious on cement realisations as supplies may rise.

 
Weak demand and prices in South India, however is not good news for cement players in Maharashtra too since South India manufacturers can push supplies to this region. A positive for west-based players is that prices in Gujarat are also expected to remain strong.
 
Not surprising then, analysts remain positive on players having exposure to north & central India as well as Gujarat. These markets have seen high level of consolidation and also improvement in capacity utilisations. Analysts at HDFC Securities feel that the recent surge in operating margins for north/central/Gujarat (NCG) based cement companies is sustainable on structural tailwinds. Capacity consolidation in these regions is further firming up and utilisation is also expected to hold above 80 per cent, say analysts, which should help sustain the support strong pricing trend in the region, bolstering profitability outlook.

 
In this backdrop, UltraTech and JK Cement remain pick of the analysts at HDFC Securities and even Motilal Oswal. While UltraTech, post-acquisition of Binani Cement's assets, has gained sizeable presence in these markets (North/Central India contributing 45 per cent to volumes), JK Cement is also to see capacity additions completing in FY20. Shree Cement and Ambuja Cements though would also benefit, but the expensive stock valuations of Shree and capacity limitations of Ambuja means that analysts have a neutral rating on their stocks.