Cement Prices Move North But Demand Remains Sluggish
Cement prices move north but demand remains sluggish. Dealers suggest that cement price hikes, which started with South in February, have become more broad-based in April-May 2019. Pan-India cement prices in 1QFY20 TD are up Rs35/bag (+11% qoq). North, East and West have seen 10-15% qoq price increase in 1QFY20 TD whereas South is sustaining the back-ended price hikes taken in 4QFY19. Channel checks suggest stagnant demand across regions, which may once again put to test the sustenance of price increases taken during the month. However, strong prices coupled with stable costs will allow margin expansion in 1QFY20E. Remain cautious on the sector.
Cement prices in April-May 2019—price hikes started in South spreads pan-India
The Pan-India cement prices were up 11% qoq in 1QFY20E or during April-May. April witnessed 7% mom increase followed by a further 2% mom increase in May. All-India cement prices have increased to Rs367/bag in May 2019 versus Rs328/bag in 4QFY19. Region-wise price trends. While price hikes were limited to South in 4QFY19, it became more broad-based in April-May 2019. North and East led the recent round of price hikes with Rs40-50/bag (+12-15% QoQ) hike whereas East and Central regions were not far behind with Rs30-35/bag (8-10% qoq) hike in 1QFY20. While South prices were up Rs31/bag (9% QoQ) in April, it was down Rs8/bag (2% mom) in May after almost 20% cumulative hike in the previous three months.
Industry registers 13% yoy growth in FY2019 but weak start to FY2020
As per DIPP data, industry volumes increased by 13% YoY to 337 mn ton in FY2019 with 12% YoY growth in 4QFY19 and 16% yoy growth in March 2019. The strong growth in FY2019 was led by the government’s housing schemes and infrastructure demand. However, April-May 2019 demand has been stagnant on a pan-India basis (DIPP data will be available with a lag). The sharp increase in prices, the slowdown in government projects pre-election, shortage of labour due to excessive heat and elections, and water shortage in a few states have all contributed to weak demand. While demand should start picking up post elections from June 2019, cement companies, in their effort to push volumes, would start reducing prices as we approach a seasonally weak monsoon.
Costs to remain stable with lower energy costs offsetting higher fixed costs
Imported pet-coke prices at US$94/ton are down 3% qoq and domestic pet coke prices at Rs7,800/ton is down 11% qoq in 1QFY20. Further, domestic thermal coal availability has improved post restocking at power plants while international thermal coal prices are down 20% qoq. It is expected that overall costs to remain stable in 1QFY20E with lower energy costs offsetting the higher fixed cost (due to lower volumes). With flat diesel prices and benefits of higher axle load norms being factored in 4QFY19 costs, freight costs should remain stable in 1QFY20E.
Maintain cautious stance on the sector on expensive valuations
Historically, April-June prices have been higher than full-year average prices it would refrain from extrapolating the current price strength. Stable costs should improve sector margins in FY2020E; however, the consensus expectations already factor in margin expansion well. It is reported that large capacity addition will keep industry utilisations low (<72%) over the next two years and will restrict sustainable improvement in margins where a cautious stance on the cement sector on expensive valuations of large-cap cement names at 12-16X FY2021E EV/EBITDA.
Region-wise cement price trends for May 2019
North—prices increase by Rs20/bag. Cement prices in North increased by Rs20/bag to Rs363/bag in May 2019—prices have increased post a decline in March. Prices increased by Rs20-25 per bag in Rajasthan, Punjab, Haryana and Delhi but were flat in Himachal Pradesh and Jammu & Kashmir.
Central—prices increase by Rs15/bag. Cement prices in the Central region increased by Rs15/bag mom to Rs369/bag. Per our channel checks, prices increased by Rs13/bag in Uttar Pradesh and by Rs20/bag in Madhya Pradesh.
West—prices increase by Rs18/bag. Cement prices increased in the West during the month by Rs18/bag to Rs358/bag. Per our checks, prices increased by close to Rs15/bag in Gujarat in cities such as Ahmedabad, Baroda and Surat while increased by Rs15-20/bag in Maharashtra.
South—prices decline by Rs8/bag. Cement prices declined by Rs8/bag on an average in South to Rs373/bag. Prices declined by Rs8/bag in Andhra Pradesh and Tamil Nadu and Karnataka by Rs10/bag.
East—prices increase by Rs18/bag. Cement prices in the East increased by Rs18/bag to Rs368/bag in May 2019 where it indicates that prices increased by Rs15-20/bag in Odisha and West Bengal but remained flat in North-East states.
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