Cost-push. All-India cement prices increased by `4/bag mom in December 2017 led by increases in the North (+`16/bag mom) as companies attempt to offset cost increase post pet-coke usage ban in three states. Prices in other regions remained largely subdued—South and East prices were flat while West saw a marginal decline. The demand environment remains weak (-2.7% yoy in October, per DIPP) and cost pressures are rising—we expect another year of earnings downgrade in FY2018E.
Cement prices increase by `4/bag mom in December 2017 led by North, Central regions
All-India cement prices increased by `4/bag mom to `323/bag in December 2017 post six straight months of decline since May 2017—however, the price increase was largely concentrated in North & Central markets which are also affected by the pet-coke ban. As per our channel checks, prices increased by `16/bag mom in the North and by `6/bag mom in the Central region while West saw a modest decline of `3/bag mom. Cement prices in the South (+`1/bag mom) and East (+Rs1/bag mom) were largely flat. We highlight that all-India prices are still down by `26/bag from the peak seen in May 2017 (`349/bag).
* North and Central—prices increase by `16/bag. In December 2017, cement prices in the North & Central regions increased by `16/bag mom & `6/bag mom to `320/bag. The price increase was the highest in Delhi (+`25/bag mom) followed by Haryana (+`20/bag mom) while Punjab and Rajasthan saw an increase of `13/bag mom. We highlight that the Supreme Court of India has banned the use of pet-coke as a fuel across the states of Rajasthan, Uttar Pradesh and Haryana (refer our note—‘Petcoke—ban extends beyond NCR’ dated November 20, 2017). We estimate that the price increase in these states will largely offset the cost inflation due to the switch to a higher cost fuel.
* West—prices decline by `3/bag. Cement prices in the West fell by `3/bag mom in December 2017. As per our checks, prices declined marginally in Maharashtra (-`3/bag mom) and Gujarat (-`2/bag mom).
* South—flat & weak. Cement prices in the South remained largely flat at `333/bag (+`1/bag mom). Prices have held up after successive declines seen in the previous two months shaving off `31/bag. Save for Kerala which saw an increase of `10/bag mom, prices were flat in most of states. The sand mining issue and weak demand continue to impact south prices.
* East—prices largely flat. Cement prices in the East were flat at `332/bag in December 2017 after an increase of `7/bag seen in November. Our checks indicate a decline in North East states (-`10/bag mom) & Odisha (-`5/bag mom) while prices in Bihar and West Bengal increased by `5/bag mom each.
Weak price trends—FY2018E likely to be another year of earnings downgrades
FY2018 started on a good note with sharp price increases seen across regions. However, subdued demand and one-off disruptions (such as during GST implementation) led to sharp price correction since May 2017.
We expect another year of earnings downgrades in FY2018E as rising costs present another headwind in a weak environment. Valuations of large cap. names are rich despite optimistic earnings estimates. We prefer Grasim Industries, JK Lakshmi and Dalmia Bharat where valuations are more reasonable (Exhibit 8).
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