Gradual recovery for cement firms

Q3 profit expected to fall and near-term outlook remains sluggish

Cement was one of the most impacted of sectors from demonetisation. 

Companies had been anticipating a pick-up in demand and looking at price increases after the festive season. Instead, with demonetisation, there was a severe volume fall in November. They gained a bit in December, helped by some price cuts. Overall, the December quarter could be a washout, volumes and realisations both taking a hit on a sequential basis. Though, year-on-year, these could be up due to earlier price hikes. Realisations in north and central India might benefit some, such as Shree Cement and JK Cement.

Given the negatives, cement stocks have fallen significantly. Shree Cement, now around Rs 15,000, is 12 per cent lower than on November 8, when demonetisation was announced. UltraTech, the largest all-India cement entity, trades 16 per cent lower at Rs 3,320. Most large and mid-cap scrips in the segment have fallen up to 40 per cent, opportunity for investors. 

Analysts at Edelweiss Securities say the demonetisation·led demand dip is temporary and the correction in cement stocks is pricing in a slowdown of 12·24 months. Excessive pessimism, they say, recommending using the current weakness as an opportunity. 

Among large-cap names, UltraTech, with the largest capacities, that are to grow further, will be a beneficiary of gradual demand recovery. Shree has remained one of the most efficient, consistently recording growth. Its pan India expansion should maintain its growth. ACC and Ambuja Cement have lagged peers with slower capacity expansions. Benefits from their merger  are likely to accrue over time, while expansion will also pick up.

Among regional entities, JK Cement will benefit from an uptick in realisations in the north and central region. Orient Cement’s new Karnataka facilities are stabilising and are bound to see growth. As will JK Lakshmi Cement, which has expanded in the east.

Among southern companies, Ramco Cement is well placed to benefit from increasing demand in Tamil Nadu and from infrastructure demand in the newly formed states of Telangana and Andhra Pradesh. So is India Cements. South India has also not seen significant price falls and all companies with exposure to this region are well placed. Investors could choose from all these, as also Dalmia Bharat, a pick of many brokerages.

However while a demand rebound is expected, it will be gradual and fraught with challenges. In January, the all-India average cement price fell by Rs 7 for a 50-kg bag to Rs 315, say analysts at Kotak Institutional Equities. 

Manufacturers are looking at price increases in some pockets, according to channel checks by Antique Stock Broking. They might have cut prices after November, looking at declining volumes and to liquidate inventory; however, they will be forced to raise prices, given rising input costs such as those of coal, feel analysts. Substantial price hikes will be seen from February, before the peak construction season sets in.

Brokerages remain positive on growth picking up over time, helped by governments initiatives on housing, infrastructure and rural demand. Analysts at Reliance Securities say there has been a pick-up in construction, as many developers intend to complete their projects before implementation of the new law governing the sector. This will support demand in the interim. 

The September and December quarters have been weak and the March quarter, though better sequentially, is also expected to be a muted one.  This will set a low base in FY17 and FY18 growth might be better.