Published on 11/07/2017 2:35:34 PM | Source: Motilal Oswal Securities Ltd

Cement Sector Update South claws back to recovery - Motilal Oswal

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South claws back to recovery

Cement demand in south India jumped back to growth trajectory (+1% YoY) in June 2017, after declining 14%/8% YoY in April/May, driven by a 25% increase in AP/Telangana volumes on a favorable base. Growth, however, was somewhat offset by 13%/11% YoY decline in Tamil Nadu/Kerala demand. On MoM basis, south demand increased 3% in June-2017, led by 5% MoM growth in AP/Telangana and TN. In 1QFY18, demand declined 7% YoY, indicating an ask rate of +12-13% in the remaining nine months to report 7-8% growth for FY18. Our channel checks suggest that the south-based companies like India Cement and Ramco Cement have seen volumes increase of ~6-8% YoY in June. Sagar Cements saw volume growth of 39% YoY in the month, led by commencement of two new facilities at Vizag and Maharashtra.


AP/Telangana market witnessing healthy growth

Demand in AP/Telangana increased 25% YoY to ~21mt (annualized demand) in June- 2017, led by a pick-in infrastructure and low-cost housing projects. Growth of 25% YoY appears slightly accentuated due to a favorable base and considering MoM demand growth of only ~5%. Demand for 1QFY18 declined by 3% YoY for the AP/Telangana market.


Tamil Nadu market continues to decline in double-digits

Demand in TN market declined 13% YoY in June-2017 due to the sand mining issues and the impact of drought. However, demand on MoM basis increased by 5%. Demand in the TN market for 1QFY18 declined 14% YoY, and is unlikely to see meaningful improvement in the next 3-4 months as monsoon in this part of the country is expected only by November/December, which will lead to continued water shortage until then.


Kerala on weak footing, Karnataka to do well

In Kerala, demand declined 11% YoY in June-2017 due to weak remittances on account of lower crude prices. In 1QFY18, demand in Kerala market declined 11% YoY, and is expected to be weak in the remaining nine months of the year. Karnataka demand was flat YoY in June and down 2% YoY in 1QFY18. Demand from Karnataka for 9MFY18 is expected to be healthy on the back of a pick-up in infrastructure demand due to elections next year.


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