IGI Logo

Price hikes announced; sustainability to be monitored

Prices increased by INR10-20/bag across regions

*  Our channel checks suggest that cement players have increased prices in the range of INR10-20/bag (up ~3-6% as compared to Jul’24 average) across regions, with effect from the third week of Aug’24. As a result, the all-India cement price is up ~4% from the Jul’24 average and ~1% from the 1QFY25 average.

*  We believe that price hikes are necessary to restrict earnings downgrades as lower demand during general elections and increased competitive intensity have kept cement prices under pressure for the last few months. Our current estimates factor in realization growth of ~4%/~1% QoQ in 3QFY25/4QFY25, which, if happens, would drive average EBITDA/t improvement of INR340 in 2HFY25 after a subdued performance in 1HFY25.

*  Further, consolidation is rising with increasing M&A activities in the industry, and a larger part of capacity addition, over the next three years, would be done by the top five players. Consequently, the capacity share of top five players is likely to increase to ~63% by FY26E from ~54% in FY24. Intensifying consolidation in the industry should lead to better pricing power in the long term.

Recent announcement forming the foundation for price rise

*  Cement prices have corrected for the last nine consecutive months (Nov’23 to Jul’24) amid higher competitive intensity followed by a slowdown in demand. The all-India average cement price was down ~13% in Jul’24 from its peak in Oct’24, and the average cement realization for our cement coverage companies was down ~8% in 1QFY25 as compared to 3QFY24. In most markets, cement price was at a multiyear low level, whereas in South (particularly in Tamil Nadu and Kerala), it was at a decadal low level.

*  However, cement companies have recently announced price hikesin the range of INR10-20/bag across regions, with effect from the third week of Aug’24. Within regions, prices are increased by INR20/bag MoM (up ~6% from Jul’24 average) in the south region, INR15/bag (up ~4-5%) in the east and west regions (each), and INR10/bag (up ~3%) in north and central regions (each).

*  Dealers have indicated that the price hike could partly be sustained as intermittent rains, higher competition, weak volume offtake in non-trade segment and upcoming festive/marriage season would lead to demand disruption. However, they also indicated that companies may attempt another price hike of up to INR25/bag in the coming weeks. We would be watchful for sustainability of these price hikes and a further attempt of price hikes, if any, in the near term.

Earnings sensitivity to realization remains high

*  In 1QFY25, most of the cement companies under our coverage universe reported lower-than-estimated profitability, mainly due to weak realization (average realization declined ~3% QoQ vs. our estimate of ~1% decline). Resultantly, average EBITDA/t was down 9%/18% YoY at INR827. Due to persistent pricing pressure and guidance of soft cement prices by companies in the near term, we estimated a further decline of ~1% QoQ in 2QFY25.

*  However, we estimated 4%/1% QoQ improvement in realization in 3Q/4QFY25, considering the expected improvement in cement demand after the monsoon season. We believe that the sustainability of the recently announced price hikes is necessary to restrict further earnings downgrades in the sector.

*  We estimated EBITDA/t for our coverage companies to decline ~13% QoQ in 2QFY25 due to softness in cement prices and seasonality impact (lower volume would lead to lower fixes cost absorption). However, our current estimates factor in an average EBITDA/t improvement of INR340 in 2HFY25 vs. 1HFY25 average EBITDA/t (estimate EBITDA/t of INR1,114 in 2HFY25 vs. INR774 in 1HFY25).

Consolidation intensifies; benefits in long term

*  In our recent thematic “Stronger Together!” we highlighted that consolidation is rising with increasing M&A activities in the industry, and that a larger part of capacity addition, over the next three years, would be done by the top five players. Consequently, the capacity share of top five players is likely to increase to ~63% by FY26E from ~54% in FY24.

*  Market concentration remained unchanged over FY13-18 as top five players’ capacity share was stable at ~47% over FY13-18. During this period, cement realization had also seen a muted ~1% CAGR. Consolidation in the industry increased over FY19-24 and top five cement companies’ capacity share increased to ~54% from ~47%. Over that period, cement realization for our coverage universe posted a healthy CAGR of ~3%. Hence, we believe that intensifying consolidation in the industry will drive a strong pricing discipline in the long term.

Outlook: Price hike announcement driving positive sentiment

*  Cement prices have seen a sharp correction in past few months, resulting in lower profitability. After the 1QFY25 earnings update, we had cut our aggregate EBITDA estimates for our cement coverage companies by ~8% for FY25, considering lower cement prices. We believe that the sustainability of the recently announced price hikes is necessary to restrict further earnings downgrades in the sector.

*  Also, we believe that increasing consolidation in the industry, cost reduction measures by leading companies (increasing usage of green power, alternative fuel logistics cost optimization etc.) and the focus on improvement in brand presence (most of the companies are improving brand architecture and internal control) are key positive factors for the sector.

*  We continue to prefer UTCEM in the large cap space and JKCE in the midcap space

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412