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We hosted a call with a cement expert (Marketing Director of an unlisted mid-sized cement company) in South India to gauge the demand and pricing outlook in the region. Key takeaways: 1) FY23 demand is estimated to have grown 13-15% with
strong momentum seen across all states. FY24 outlook remains sanguine in the run up to the election year; 2) pricing remains weak (despite supportive demand) owing to high-competitive intensity mainly from the top 5 players. While April 2023
saw a marginal price rise (Rs5-10/bag), sharp decline in the last fortnight of March 2023 (due to year-end volume push) suggests a long road to recovery. Pricing outlook remains uncertain, and 3) continued capacity additions suggest low utilisations are here to stay.

We broadly concur with the expert view and believe prices in South India could continue to stay volatile. We maintain NEUTRAL view on cement sector.

* Demand in positive strides: Real growth only from FY24- cement demand in South India is estimated to have surged 13-15% in FY23 (vs all India growth of 9- 10%). However, in absolute terms, volumes are merely back to FY19 levels. It may be recalled that South demand was believed to have surged >15-18% in FY19 but saw sharp declines in FY20 (owing to high base) and FY21 (covid impact). Thereafter, handsome recovery was seen in FY22 and FY23. Demand in non-trade segment (bulk category) is believed to have grown at a pace faster than trade segment (retail). Outlook for FY24 stays sanguine with expectation of a continued double-digit growth in the run up to the election year. This optimism stands tall regardless of the potential soft patch (of 1-2months) in the states of Karnataka and Telangana due to state elections.

* Pricing environment remains fragile: Tamil Nadu is the latest casualty- pricing continues to stay weak and in complete disregard to the supportive demand environment. Pricing fragility can be appreciated by the fact that volume aggression from a small player too can have a cascading impact on cement prices in the region. March 2023 saw huge volume push in the industry leading to a sharp price drop in the second fortnight. While April 2023 has seen a recovery of Rs5-10/bag, current prices are still materially down vs the average for Q4FY23. Tamil Nadu seems to be the latest casualty of the prevailing high-competitive intensity in the region. Volume aggression by top 4-5 players in the state has seen pricing of A category players come off ~10% since the beginning of January 2023. This in turn has also pruned pricing gap of A vs C category players to a mere Rs15/bag as of now vs Rs40-50 historically.

* Capacity additions continue: Low utilisations here to stay- the region continues to see steady capacity additions from existing as well as new players. The next 3-4 years may see capacity addition of 30-40mtpa in the race of maintaining/gaining market share. As a result, low utilisations in the region are here to stay and in turn may keep pricing situation on tender hooks for a foreseeable future.

* Outlook and valuation: All is not well- we broadly concur with the cement expert view on the weak pricing outlook of the region despite supportive demand. While the industry missed pricing action in April 2023, continued weakness (or
underappreciated recovery) in May 2023 may pose risk to consensus earnings forecast.

Citing the weak pricing power, not just in South India but across regions, we maintain our NEUTRAL view on the sector. Refer our latest note ‘Losing the plot...’ (link) for our detailed hypothesis on the same.

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