It's the end of earnings downgrades for cement

Recent price increases should improve profitability

After a few subdued quarters, cement prices have shown an uptick. Prices rose to Rs 280 per 50-kg bag, from Rs 210-220 a bag in December 2015-January 2016. Analysts at Religare attribute it to the pickup in infrastructure activity and normalisation in supplies.

In West, too, prices are up Rs 20-40 per bag, with prices in Maharashtra and Gujarat having touched Rs 290 and Rs 270 a bag levels. Prices in South India had already gained 8.5 per cent over a year in the December quarter. On the demand side, analysts expect more recovery after Holi. The months up till June are considered best in terms of demand, as thereafter monsoon sets in, thereby subduing construction activity.

Experts are now banking on further recovery in infrastructure after the Budget’s infrastructure push. However, this might take some time, given the process involved in fund allocation and project awarding. So, post monsoon season is the time when analysts foresee a good uptick in demand.

Anil Kumar Pillai, director & chief executive, JSW Cement, is hopeful of the same. He said boost to rural economy would provide impetus to demand from rural areas, which remains crucial to drive growth.

Analysts at Ambit say government’s rural programmes will provide impetus to near-term demand and UltraTech’s mega acquisition will reduce fragmentation/market share tussle that caused weak pricing (one per cent compound annual growth rate or CAGR over FY13-16) in the past three years.

Slower capacity addition will also help. India Ratings expects producers to add 40 million tonnes per annum (mtpa) capacity over FY15-FY17, a CAGR of 4.9 per cent, lower than 5.8 per cent growth seen during FY13-FY15 (additional 42 mtpa).

Overall, the current uptick is positive for realisations and builds hopes for further recovery. Ambit feels the less-favoured names — ACC and Ambuja Cements trade at relatively inexpensive valuations (10-10.5 times the CY16 Ebitda) and consensus estimates need upgrades to account for pricing and efficiency improvements.

Most other players, too, stand to gain. Analysts at Motilal Oswal say their near-term conviction is in North-Central bets, as JK Lakshmi Cement, JK Cement and Prism Cement, while UltraTech remains their preferred pick, as is the case with most brokerages.

What’s more, higher volumes, better prices and benign costs (fuel and transportation) should improve Ebitda per tonne of cement players, arresting the earnings downgrades for large-caps, say analysts at Religare.