Demand weakness persists; cost reduction to support margins
UltraTech, Shree Cement, ACC, Ambuja and Dalmia Bharat – the five largest Indian cement companies account for ~50% of total industry capacity. We thus read into the secondquarter results and commentary of these companies, along with inputs from our channel checks, to highlight the ongoing industry trends and our outlook for the rest of the year.
* Industry volumes declined ~3% YoY in 2QFY20 due to heavy rains and tight liquidity conditions. While companies expect demand to improve in 2HFY20, our channel checks indicate muted trends in 3QFY20, restricting second-half growth to ~4% YoY.
* Realizations were weak across India in the quarter, with the decline being more prominent for companies based in south/east (down 9-11% QoQ) than north/central (down 1-3% QoQ). Not much has changed even now with prices in south/east 4-5% below the 2QFY20 average, according to our channel checks.
* The cement industry was not able to benefit from the sharp decline in fuel costs in 2QFY20 due to the high-cost inventory lying with companies and nearly 45-60 days’ time lag between ordering and receiving consignments. Nevertheless, with realization of the cost benefit and seasonal pick-up in demand, fixed cost absorption will likely improve, driving a cost reduction of ~INR180-200/t QoQ for the industry in 3QFY20. This, in our view, should support margins and neutralize up to ~4% QoQ decline in cement prices.
* For 1HFY20, NWC was largely under control for the industry, barring players (Orient and Sagar) based in AP/Telangana, which reported near doubling in NWC.
* New capex announcements were limited in 1HFY20 as none of the companies announced clinker additions. Moreover, given weak demand, the commissioning of some of the announced cement capacities is being delayed.
Demand impacted by liquidity/floods; expect 4% YoY growth in 2HFY20
* Cement demand was impacted by heavy rains, tight liquidity conditions and lower government spending. Consequently, aggregate volumes (adjusted for UTCEM’s acquisition of Binani) were down 3% YoY in 2QFY20. This comes on the back of a 1.5% YoY decline in the previous quarter, implying a fall of 2% YoY in 1HFY20.
* According to UltraTech, demand grew at only 4-5% YoY in north and declined across all other regions, particularly south/east (down ~4% YoY).
* Amongst companies, Dalmia Bharat (DBL) performed relatively well with 8% volume growth, implying market share gains. However, it is likely that this growth has come at the cost of price, as realization decline was the steepest for the company (-10% QoQ).
* With the liquidity situation still tight, demand weakness is likely to continue into 3QFY20 as well and a recovery will manifest only by 4QFY20. We expect 4% YoY volume growth in 2HFY20. Diverging realization trends: Weak in south/east, strong in north/central
* Average reported realizations for companies increased 5% YoY but were down 4% QoQ due to the price rollback from May’19, particularly in south/east (entire price hike of ~17% rolled back). Pricing, however, has remained strong in the north and central India.
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