Cement players stare at earnings cuts

Inspections by brokerages suggest sales are down sharply at retail level; rebound likely in early 2017

Note ban has hit cement players, inspections by brokerages suggest. There is acute shortage of cash at the retail level (15-25 per cent of sales). Reliance Securities’ checks suggest retail sales declined 20-50 per cent month on month, as less cash in circulation hit construction. The trend is unlikely to change in December. 

Cement prices have seen some decline in certain regions. While central India and northern India have seen stable prices, rest have seen a Rs 3-5 fall in the price of 50-kg cement bag. This comes at a time when costs of inputs, including fuel, are moving up. 

The situation is in sharp contrast to the pre-demonetisation days, when estimates suggested a strong demand boost after Diwali. According to analysts, the earnings of cement companies will come under pressure in the December quarter. 

Binod Modi at Reliance Securities says, “We have factored in possible volume loss for cement companies under our coverage and accordingly trimmed down Ebitda (earnings before interest, taxes, depreciation and amortisation) estimates by 5-15 per cent over FY17-FY19.” 

While the short-term outlook remains muted, analysts also point to some positive aspects. For instance, the demand from non-trade/project segment has not seen much impact as this segment works. Unless the demand slowdown prolongs, analysts are of the view that cement sales should rebound from in the first quarter of 2017. Analysts at Edelweiss say that demonetisation appears to be a temporary blip on Indian cement demand. They feel that structurally, rising housing shortages — a segment which drives 60-65 per cent of total cement demand in India — would push cement demand sooner than later. 

Given the slowdown in real estate sector, experts also see a correction in realty and land prices, thereby making housing affordable. Cement companies at a Prabhudas Lilladher’s conference held last week said that demonetisation would slow down the runaway prices in real estate and bring stability in land dealings. Hence, it would boost affordability and stimulate the end-user housing demand in the long run.

Among large-cap pan-India players, UltraTech remains the top pick, followed by ACC and Ambuja Cements. Analysts at Elara Capital say ACC trades at 81 per cent of its replacement cost, the lowest valuation since FY06. Among mid-cap or regional players, JK Lakshmi Cement and Orient Cement are seen as picks.

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