Published on 11/10/2017 12:49:22 PM | Source: Kotak Securities Ltd

Cement Sector—on a weak footing - Kotak Sec

Posted in Broking Firm Views - Sector Report| #Kotak Securities Ltd #Cement Sector #Sector Report

Cement prices—on a weak footing.

All-India cement prices declined by ₹8/bag mom in October 2017, maintaining the weak trend seen through the monsoon period. Price changes were marginal in North and West markets while South and East saw a sharp fall of ₹16-18/bag mom. Weak price trends threaten another year of earnings downgrades on the back of optimistic assumptions. Valuations for large-cap names are rich notwithstanding projected strong growth in earnings trajectory. We prefer Grasim Industries and select mid-cap names that offer relative valuation comfort.


All-India cement prices decline by ₹8/bag in October; prices decline sharply in East, South

All-India cement prices declined by ₹8/bag mom to ₹324/bag in October 2017 (in a seasonally weak monsoon period). Prices declined in most of regions save for West (which had earlier seen a sharp decline in September). As per our channel checks, price declined sharply in the East (-₹18/bag mom) and South (-₹16/bag mom) while prices in the West (+₹1/bag) and North (-₹3/bag) saw marginal changes. We highlight that prices in all regions except West are back to March 2017 levels, giving up most of the pricing gains seen in April 2017.

*  North and Central—a marginal decline. Cement prices in the North and Central regions declined marginally by ₹3/bag to ₹305/bag and ₹2/bag to ₹313/bag mom, respectively. As per our checks, some of the markets in North such as Delhi (-₹10/bag mom) saw a sharp correction in prices, while some pockets in Punjab ducked the trend with +₹5/bag mom increase.

* West—largely unchanged. Cement prices in the West saw a marginal increase of ₹2/bag mom in October 2017, after a sharp decline of ₹12/bag mom in September 2017. Our checks indicate that prices were either flat or declined marginally in Maharashtra while Gujarat saw an increase of ₹2-8/bag across cities.

* South—prices decline by ₹16/bag. Cement prices in the South declined sharply by ₹16/bag mom and are currently at ₹348/bag. Prices declined by ₹20-25/bag mom in AP/Telangana region while Tamil Nadu saw decline of ₹25/bag mom.

* East—prices decline by ₹18/bag. Cement prices in the East declined by ₹18/bag mom in October after a decline of ₹8/bag mom in September; the average price are now back to March 2017 levels of ₹326/bag. Our checks indicate steep decline in West Bengal and Assam (-₹30/bag mom) while price cuts were less punitive in Bihar (-₹15/bag mom) and Odisha (-₹10/bag mom).

Pet-coke prices firm up; industry volumes subdued with decline of 1.3% yoy in August 2017

Imported pet-coke prices increased to US$99/ton in October 2017; prices have steadily risen since July 2017. While the average pet-coke prices were lower by 6% qoq in 2QFY18 to US$90/ton (mainly due to lower prices in July), we believe it may not benefit 2QFY18 earnings due to lagged effect of inventories. As per DIPP, the industry volumes declined by 1.3% yoy in August 2017 after 2.7% yoy decline seen in July 2017. We expect companies under our coverage to report 6% yoy growth in volumes in 2QFY18, similar to trends seen in 1QFY18.

Weak price trends may again risk FY2018E estimates with another year of earnings downgrade

Recent price trends, likely on account of an extended monsoon season, threaten earnings downgrades for another year counting. The only relief could be that the downward revision reflects potential decrease in tax incidence under the new GST regime. Valuations of large-cap names are rich despite optimistic earnings estimate. We prefer Grasim Industries and select midcap names where valuations are more reasonable (Exhibit 8).


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