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Strong Realisation to Aid Performance
Having witnessed strong demand environment over 2HFY18-FY19, the domestic cement companies are likely to report subdued sales volume in 1QFY20 led by soft demand scenario, as the industry’s demand is expected to have witnessed 7-10% de-growth during the quarter. A slowdown in government spending on the backdrop of General Elections, labour unavailability, water scarcity and persistent absence of private capex took a toll on demand. The cement companies under our coverage universe are expected to report an average ~2% YoY de-growth in volume, despite ~6% YoY growth in UltraTech Cement’s sales volume led by new capacities.
However, healthy realisation recovery across the regions and benign cost environment during the quarter are likely to aid the cement companies to report decent improvement in their quarterly profitability. The cement companies under our universe are expected to report average EBITDA and PAT growth of 34% YoY and 36% YoY, respectively. While operating cost/tonne is likely to inch-up by marginal ~1% QoQ (~Rs40-60/tonne) led by impact of lower utilisation, average realisation of the industry sequentially improved by ~8%.
As per our channel check, all regions witnessed sequential price hikes in the range of ~6-14% mainly led by substantial price hike in Northern and Western pockets. However, soft demand scenario resulted in higher discounts and incentives for which the actual impact of realisation growth might not be to the extent of actual billing prices. Barring ACC, Ambuja and HeidelbergCement, all cement companies under our coverage universe are likely to report ~30-80% YoY growth in EBITDA. UltraTech Cement and Shree Cement are likely to report unitary EBITDA in the excess of Rs1,200.
Subdued Demand to Impact Sales Volume
Demand slowdown mainly led by contraction in construction activities due to election code of conduct, water crisis and labour shortage is likely to impact sales volume of cement companies. We expect the cement companies under our coverage universe to witness average volume de-growth of ~2% YoY with Shree Cement is expected to register a steeper volume decline to the tune of ~13% YoY followed by HeidelbergCement by 9%. UltraTech is likely to report ~6% YoY volume growth due to newly added capacities, while Holcim Group companies are to report 3-6% YoY decline in volume.
Strong Pricing to Turn Saviour
A substantial price hike across the regions since Feb’19 resulted in robust pricing for the cement companies, as our channel check indicated that all-India average cement price increased by ~8% QoQ during 1QFY20. Northern and Western regions witnessed stronger sequential price recovery to the tune of 14% and 9%, respectively, while other regions witnessed price recovery in the range of 5-6% QoQ. We further note that higher discounts and incentives offered by the companies in a weak demand scenario may result in 60-70% improvement in total realisation.
Benign Cost Environment Augurs Well
The prices on the key inputs and fuel remained broadly benign during the quarter. We note that while the imported petcoke prices (USA) boradly remained flat (-15% YoY), in the domestic market MRPL and Reliance Petcoke too moderately increased by 3% QoQ. Further, the diesel prices remained broadly flat too on QoQ basis. Further, international coal prices declined sharply by ~5-10% QoQ in 1QFY20. We expect operating cost/tonne of the cement companies is likely to increase by marginal Rsa40-60/ tonne mainly due to lower utilisation.
Our Top Results Picks are: UltraTech Cement and JK Cement
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