Healthy demand along with uptick in realization to restrict input cost pressure:
The cement companies under our coverage (ex-Grasim) is expected to grow its Q1FY2018 revenue by 11% YoY largely driven by higher volumes (up 7.6% YoY) and better realization (up 2.7% YoY). The average pan-India cement prices for Q1FY2018 increased 6.6% YoY (up 9.4% YoY) which was lead by strong growth in Western (up 12% YoY) and Eastern region (up 10% YoY). The Northern and Central region witnessed 5-6% YoY growth while the southern region remained subdued at just 1% YoY growth. We expect the earnings of cement companies under our coverage (ex-Grasim) to decline marginally by 1.3% YoY (up 28.2% QoQ), as higher power & fuel cost and freight costs puts pressure on operating margins.
Southern players expected to suffer on relatively muted realization growth:
The South India-based cement players like The Ramco Cements and India Cements are likely to post relatively higher volume growth although realizations are expected to witness a marginal rise YoY. Consequently, we expect the pressure on Operating Profit Margin (OPM) to result in a muted earnings growth.
Outlook – Uptick expected post a seasonally weak Q2:
The demand of cement is likely to improve on account of diminishing effects of demonetisation and an uptick in government spending on infrastructure development and housing projects. The average cement price is likely to decline sequentially in Q2FY2018 which is a seasonally weak quarter due to onset of monsoons. The key monitorables during current fiscal would be the improvement of cement demand, sustenance of cement pricing discipline and containment of higher input costs (power & fuel and freight costs). The improvement in capacity utilization along with revival in cement prices in Southern region will also be tracked keenly.
Valuation – high on expectations:
We believe that cement stocks have largely factored in expectations of an improvement in demand supported by pricing discipline. We would await for strong cement demand outlook from Infrastructure and housing sectors and subsiding effects of higher input costs. The materialization of above events can trigger further re-rating of valuation multiples as operating leverage kicks in with strong cash flow generation. The delay in demand revival, pressure on cement prices and further increase in input cost are key risks for the sector. At this juncture we maintain a Hold rating on the stocks under our coverage
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