Published on 14/06/2019 1:39:45 PM | Source: Emkay Global Financial Services Ltd

Cement Sector - Delhi/NCR meetings: significant drop in demand By Emkay Global

Posted in Broking Firm Views - Sector Report| #Cement Sector #Emkay Global Financial Services Ltd. #Sector Report

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Delhi/NCR meetings: significant drop in demand; prices remain high

* Meeting with industry participants in Delhi/NCR: We met industry people including cement stockists, marketing people, cement companies (JK Lakshmi Cement and Orient Cement) and equipment supplier in Delhi/NCR in order to understand demand/cement pricing scenario and equipment ordering status. Though cement prices have not seen much of a correction in North, demand has taken a knock and this remains a cause for concern. Most expect some decline in cement prices going forward and few of them believe average price increase in FY20 should be limited to 3-4% yoy.

* Significant demand drop seen in May’19; not much improvement visible in Jun’19: Sales volume for the industry has seen a steep decline after Mar’19. This seems to be driven by higher spending during the pre-election period, unavailability of laborers and surging temperature levels. However, few industry people are of the view that these concerns (apart from general elections) exist every year and there seems to be liquidity crunch that is causing a decline in demand. According to industry people, sales volumes were down 3.2% yoy/14.9% yoy in Apr/May’19 and the trend in Jun’19 remains similar to that of May’19. Industry volumes are expected to fall by 14-17% yoy in Jun’19 considering the current demand trends. In Rajasthan, average monthly consumption used to be 2mt (2.3mt in Mar’19), which declined to 1.7mt in May’19.

* Takeaways from meeting with JK Lakshmi and Orient Cement: JK Lakshmi Cement could plan for brownfield expansion (a clinker capacity of 1.3mtpa) either at Sirohi or Udaipur plant. CPP (20MW) at its Durg plant will get commissioned in this month, whereas the Cuttack GU will get commissioned in Jul’19. It expects debt reduction of Rs3bn in FY20. Orient Cement’s brownfield expansion plant at Devapur in Telangana has been delayed as the company has yet not received Environmental Clearance (EC). The EC is expected to be received by Q3/Q4FY20 and the company eyes Rs21.5bn in capex for this expansion plan.

* Equipment ordering expected for ACC, My Home Industries and JSW Cement (grinding capacity): Companies that have started discussions on equipment ordering include ACC, My Home Industries and JSW Cement (for a grinding unit of 1.5mt at Salem in Tamil Nadu). ACC plans to set up a Greenfield unit at Ametha in Madhya Pradesh’s Katni district with a clinker capacity of 9,500 tpd (3.14mtpa). My Home Industries aims to set up two clinker units of 5,500 tpd (1.82mt) each in the South. These orders (only one kiln of My Home Industries) are expected to be placed in the next few months.

* Our view: We believe that steep hikes in cement prices are not sustainable and there could be a decline in prices once the demand from non-trade segment improves. We have factored in a 4-5% yoy increase in average realizations for companies under our coverage - much lower than the current prices trends, especially in the North. Our recent channel checks indicate discounts of Rs5-15/bag in few North region markets, sustenance of only Rs15-25/bag increase in East markets and discounts of Rs20-25/bag in few South/West region markets. We believe that stocks could come under pressure due to this in the near term and pricing behavior of cement companies should remain the key monitorable.

* EAP position: Our preferred picks in the sector are UltraTech, ACC and JK Cement. We maintain EW stance on ACC/UltraTech/Shree/Ramco Cements, while UW position on Ambuja Cements/Grasim in sector EAP. We have reduced our weights in JK Cement/Star Cement by 3bps each, considering near-term challenges in the sector. Key risks could be sustenance of higher cement prices and a decline in energy/freight costs.


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