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Demand Momentum Remained Soft; Higher Realisation Sustained
* Demand environment continued to remain subdued in May’19 on account of lack of governments spending led by General Elections, labour shortage, water shortage in several pockets and general liquidity issues. Our interaction with dealers also reflects that unlike past years, they did not witness any sign of pre-monsoon demand so far, as the consumers are deferring their purchase anticipating prices to cool off in the coming weeks, which does not appear as of now. Volume declined by 10-30% MoM at most dealers’ level despite April being a soft month in terms of demand. However, they are hopeful about demand recovery in the current month led by premonsoon demand.
* Further, a substantial price hike by the organised cement players resulted in sudden jump in utilisation of mini cement plants across the country, as the price difference of ~Rs80-100/bag led to higher demand for small/mini cement brands. However, considering their miniscule size, the organised players are not worried as of now.
* All-India average cement price in trade segment hovered at ~Rs330-335/bag (+11.6% YoY and +0.4% MoM) at the end of May’19 mainly led by continued price improvement in Northern (+1.6% MoM) and Central (+1.5% MoM) regions. Further, the prices in other regions continued to remain steady despite roll back of the price hikes undertaken in the first week of the month in several pockets.
* We further note that there are higher incentives and different schemes being offered by the companies to dealers/distributors (in ~Rs10-15/bag range) mainly to jack up sales volume. However, there is no indication from the companies to reduce prices as of now despite soft demand.
* While it is difficult to predict about any price decline during monsoon (i.e. last year monsoon, we witnessed only Rs12/bag price decline), we believe the companies are unlikely to cut prices sharply this monsoon also. Given the companies cut prices by Rs10-15/bag in the current monsoon, cement prices will continue to trade at higher side.
* Average price for 1QTD-FY20 is up by ~9% QoQ mainly led by recent price jump seen in Northern, Eastern and Western regions. Hence, the cement companies are likely to report stronger QoQ and YoY operating performance despite soft volume. Further, benign cost environment should also aid performances of the cement companies.
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