Cement demand recovery continued in 1QFY15, driven by strong rural housing demand and partial resolution of sand mining issue.
In Q1FY15, the cement industry is expected to report strong volume growth of approximately 8 per cent y-o-y on account of low base, a delayed monsoon and the lag impact of pre-election spending. Cement volume is likely to decline marginally by 1 per cent q-o-q, due to seasonality.
Firms having a higher presence in North and West are likely to post strong double-digit volume growth due to robust demand in key markets. We have a positive view on the sector, as we believe structural up-cycle coinciding with economic revival could throw positive surprise on volume growth, realisations and margins over the next few quarters.
Demand improvement visible during Q1FY15 as well
All-India cement sales volumes have shown some visible signs of growth during April and May with y-o-y production growth of 6.7 per cent and 8.7 per cent, respectively. There has been good demand during June as well along with delayed monsoon resulting in a better quarter in terms of demand. After sluggish production growth of 3 per cent y-o-y during FY14, early signs of demand improvement in FY15 kept hopes alive, hinging on the new government.
Improved pricing scenario q-o-q & y-o-y
All-India average cement prices are expected to improve by 4 per cent q-o-q and 3 per cent y-o-y, due to the full impact of sharp price hikes witnessed in North and West India during February-March 2014. We expect cement realisation to improve by approximately 3 per cent y-o-y. The northern, western, central and southern regions are expected to see prices to increase by approximately 3 per cent q-o-q, approximately 6 per cent q-o-q, approximately 4 per cent q-o-q and approximately 2 per cent q-o-q, respectively. Prices in the eastern region are expected to decline by 1 per cent q-o-q.
Zone wise cement price demand
North – Delhi and Punjab witnessed lowest increase of Rs 8/bag in the quarter as compared to other regions in the country.
Cement prices in Haryana and Rajasthan had gone up by an average of Rs 14 and Rs 23, respectively.
Central – Prices in UP rose by an average of Rs 10/bag on the back of relatively better demand, dearth of railway rakes and reduced flow of material from North. Prices in MP rose by Rs 9/bag, similar to UP.
West – Average price in Maharashtra rose by Rs 15/bag q-o-q on the back of an increase of Rs 25 in the state, excluding Mumbai. Prices in Mumbai remained flat q-o-q. Gujarat remained strong with a price increase of Rs 22/bag on the back of reduced supplies and better demand.
South – Prices in AP rose steeply by approximately 50 per cent, Rs 100, during June to Rs 310/bag, given the unfeasible price levels and positive sentiments. Prices in Tamil Nadu and Kerala rose by an average of Rs 25 and Rs 14/bag q-o-q, largely on account of a tight discipline. On the contrary, Karnataka disappointed, with flat prices q-o-q. However, prices in the state rose by Rs 40/bag during June.
East – Prices in West Bengal and Bihar, the most prominent states in the region, fell by Re 1 and Rs 2/bag q-o-q, respectively, while prices in Orissa and Chhattisgarh remained flat. Hence, the regions average fell by Re 1/bag. Companies increased cement prices across all regions during the quarter.
On a y-o-y basis, the increase in prices may be higher in western and northern regions while the southern region has seen a sharp improvement in price sequentially after the bifurcation of Andhra Pradesh.
Cost pressures to persist
Freight cost is expected to continue to rise q-o-q as well as y-o-y, given the increase in diesel prices. Apart from this, firms using petcoke are also likely to see a rise in power and fuel cost, due to an increase in petcoke prices by approximately 5 per cent. However, other variable costs are expected to remain flat q-o-q.
Profitability to increase led by better realisation
With higher realisation, we expect EBITDA/tonne to increase y-o-y. Costs like power and fuel as well as freight costs are expected to increase y-o-y but higher realisation will offset the increased cost. Profitability is likely to remain stable q-o-q, as the benefit of higher price range gets offset by freight cost pressure and negative operating leverage.
While players focused on South India would benefit significantly from sharp pricing recovery, weak pricing would impact profitability of players based in North and East India.
Demand has started registering an improvement post the election outcome and on expectations of revival in construction activity. Cement prices have also improved in line with demand improvement and average cement price at the end of June stood at Rs 320 per bag. Increase in the cement prices was also led by delayed onset of monsoons in most parts of the country.
We however expect cement prices to come under pressure during Q2FY15 with the onset of monsoons. Pace of capacity additions has slowed down and thus post monsoons, cement prices are expected to firm up. Demand is expected to witness further improvement led by increased spending for rural and semi urban housing and improvement in ordering activity for infrastructure projects.
Currently Indias cement industry is facing a problem of excess supply, with overall capacity at approximately 370 mtpa exceeding the demand by approximately 110 mtpa. The countrys cement demand has been weak over the past few years due to the economic slowdown. Over FY10-14, Indias cement demand growth has been modest at 5 per cent CAGR.
However, the capacity addition has remained unabated with approximately 80 mtpa of capacity being added over the period. This has resulted in excess supply and all-India cement utilisation falling to a low of approximately 70 per cent. Low capacity utilisation has eroded the pricing power of cement manufacturers who have found it difficult to increase the prices despite the increase in cost pressures.
Going ahead, we expect cement demand to witness improvement from H2FY15, aided by recovery in overall economy and formation of new central government, which could provide momentum to infrastructure activities.
The recent Budget proposals could also help in this. Going forward, we would be watching out for demand revival across regions as well as sustainability in cement price hikes.
Cement sales volumes are expected to increase by 5 per cent y-o-y (q-o-q decline of 1-1.5 per cent) to 6.4 MT in Q2CY14, which is lower than industry average due to the companys large exposure to the southern region where demand growth was low. Net realisation could have gone up by 2-3 per cent y-o-y. This could result in net revenues to go up by 6-7 per cent y-o-y. However with ACCs higher exposure to railway transport and higher reliance on domestic linkage coal, per ton costs for ACC are expected to increase y-o-y resulting in EBIDTA declining. Sequentially performance is expected to be better.
Ambuja Cements volume could increase by 6.5 per cent y-o-y. With increase in cement price in western region (mainly Gujarat), realisations are expected to improve 3.5 per cent y-o-y leading to revenue increase of 10-11 per cent y-o-y. Despite increase in freight costs (led by higher railway freight) 7.5 per cent growth in volumes could help contain cost inflation with total cost remaining largely flat y-o-y. The EBITDA/tonne is expected to increase y-o-y due to better realisations and better operational efficiency. Sequentially, we expect increase in EBITDA largely driven improvement in realisations.
VSF volumes are likely to grow 10 per cent y-o-y (but decline 14 per cent q-o-q). However, VSF realisations could decline. Low realisations along with firm input costs could result in EBITDA margin declining y-o-y translating into lower PAT. Input costs are expected to increase, primarily on account of rise in freight and raw material costs.
UltraTech Cement could report strong quarterly performance with cement volume growth of 13-14 per cent y-o-y leading to a similar revenue growth y-o-y. The sales volume is expected to have increased in Q1FY15 with better demand in Northern and Western regions. Blended realisation is expected to increase 2-3 per cent y-o-y. With solid volume growth, total cost/tonne is expected to remain flat y-o-y as UTCL reaps benefits of operating leverage. With capacity addition leading to jump in depreciation, net profit for the quarter is also expected to show a small jump y-o-y.
Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings
Region-wise,the southern region comprises 35% of the total cement capacity, followed by thenorthern, eastern, western and central region comprising 20%, 18%, 14% and 13%of the capacity, respectively.
The cement industry is expected to post positive margins on decent price hikes over the months, falling raw material prices and marked drop in overall production costs, said an analysis of Care Ratings.
Wholesale and retail prices of cement have increased 11.9% and 12.4%, respectively, in the current financial year. As whole prices have remained elevated in most of the markets in the months of FY20, against the corresponding period of the previous year.
Similarly, electricity and fuel cost have declined 11.9% during 9M FY20 due to drop in crude oil prices. Logistics costs, the biggest cost for cement industry, has also dropped 7.7% (selling and distribution) as the Railways extended the benefit of exemption from busy season surcharge. Moreover, the cost of raw materials, too, declined 5.1% given the price of limestone had fallen 11.3% in the same aforementioned period, the analysis said.
According to Care Ratings, though the overall sales revenue has increased only 1.3%, against 16% growth in the year-ago period, the overall expenditure has declined 3.2% which has benefited the industry largely given the moderation in sales.
Even though FY20 has been subdued in terms of production and demand, the fall in cost of production has still supported the cement industry by clocking in positive margins, the rating agency said.
Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. The cement sector will be seeing a sharp growth in volumes mainly due to increasing demand from affordable housing and other government infrastructure projects like roads, metros, airports, irrigation.
The government’s newly introduced National Infrastructure Pipeline (NIP), with its target of becoming a $5-trillion economy by 2025, is a detailed road map focused on economic revival through infrastructure development.
The NIP covers a gamut of sectors; rural and urban infrastructure and entails investments of Rs.102 lakh crore to be undertaken by the central government, state governments and the private sector. Of the total projects of the NIP, 42% are under implementation while 19% are under development, 31% are at the conceptual stage and 8% are yet to be classified.
The sectors that will be of focus will be roads, railways, power (renewable and conventional), irrigation and urban infrastructure. These sectors together account for 79% of the proposed investments in six years to 2025. Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward.
Similarly, the Pradhan Mantri Awaas Yojana, aimed at providing affordable housing, will be a strong driver to lift cement demand. Prices have started correcting Q4 FY20 onwards due to revival in demand of the commodity, the agency said in its analysis.
Industry’s sales revenue has grown at a CAGR of 7.3% during FY15-19 but has grown only 1.3% in the current financial year. Tepid demand throughout the country in the first half of the year has led to the contraction of sales revenue. Fall in the total expenditure of cement firms had aided in improving the operating profit and net profit margins of the industry (OPM was 15.2 during 9M FY19 and NPM was 3.1 during 9M FY19). Interest coverage ratio, too, has improved on an overall basis (ICR was 3.3 during 9M FY19).
According to Cement Manufacturers Association, India accounts for over 8% of the overall global installed capacity. Region-wise, the southern region comprises 35% of the total cement capacity, followed by the northern, eastern, western and central region comprising 20%, 18%, 14% and 13% of the capacity, respectively.
Installed capacity of domestic cement makers has increased at a CAGR of 4.9% during FY16-20. Manufacturers have been able to maintain a capacity utilisation rate above 65% in the past quinquennium. In the current financial year due to the prolonged rains in many parts of the country, the capacity utilisation rate has fallen from 70% during FY19 to 66% currently (YTD).
Wonder Cement shows journey of cement with new campaign
The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…
Cement manufacturing company Wonder Cement, has announced the launch of a digital campaign ‘Har Raah Mein Wonder Hai’. The campaign has been designed specifically to run on platforms such as Instagram, Facebook and YouTube.
#HarRaahMeinWonderHai is a one-minute video, designed and conceptualised by its digital media partner Triature Digital Marketing and Technologies Pvt Ltd. The entire journey of the cement brand from leaving the factory, going through various weather conditions and witnessing the beauty of nature and wonders through the way until it reaches the destination i.e., to the consumer is very intriguing and the brand has tried to showcase the same with the film.
Sanjay Joshi, executive director, Wonder Cement, said, "Cement as a product poses a unique marketing challenge. Most consumers will build their homes once and therefore buy cement once in a lifetime. It is critical for a cement company to connect with their consumers emotionally. As a part of our communication strategy, it is our endeavor to reach out to a large audience of this country through digital. Wonder Cement always a pioneer in digital, with the launch of our IGTV campaign #HarRahMeinWonderHai, is the first brand in the cement category to venture into this space. Through this campaign, we have captured the emotional journey of a cement bag through its own perspective and depicted what it takes to lay the foundation of one’s dreams and turn them into reality."
The story begins with a family performing the bhoomi poojan of their new plot. It is the place where they are investing their life-long earnings; and planning to build a dream house for the family and children. The family believes in the tradition of having a ‘perfect shuruaat’ (perfect beginning) for their future dream house. The video later highlights the process of construction and in sequence it is emphasising the value of ‘Perfect Shuruaat’ through the eyes of a cement bag.
Tarun Singh Chauhan, management advisor and brand consultant, Wonder Cement, said, "Our objective with this campaign was to show that the cement produced at the Wonder Cement plant speaks for itself, its quality, trust and most of all perfection. The only way this was possible was to take the perspective of a cement bag and showing its journey of perfection from beginning till the end."
According to the company, the campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV. No other brand in this category has created content specific to the platform.
In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)
Cost cuts and better realizations save? the ?day ?for ?UltraTech Cement, Updated: 27 Jan 2020, Vatsala Kamat from Live Mint
Lower cost of energy and logistics helped Ebitda per tonne rise by about 29% in Q3
Premiumization of acquired brands, synergistic?operations hold promise for future profit growth Topics
India’s largest cement producer UltraTech Cement Ltd turned out a bittersweet show in the December quarter. A sharp drop in fuel costs and higher realizations helped drive profit growth. But the inherent demand weakness was evident in the sales volumes drop during the quarter.
Better realizations during the December quarter, in spite of the 4% year-on-year volume decline, minimized the pain. Net stand-alone revenue fell by 2.6% to ?9,981.8 crore.
But as pointed out earlier, lower costs on most fronts helped profitability. The chart alongside shows the sharp drop in energy costs led by lower petcoke prices, lower fuel consumption and higher use of green power. Logistics costs, too, fell due to lower railway freight charges and synergies from the acquired assets. These savings helped offset the increase in raw material costs.
The upshot: Q3 Ebitda (earnings before interest, tax, depreciation and amortization) of about ?990 per tonne was 29% higher from a year ago. The jump in profit on a per tonne basis was more or less along expected lines, given the increase in realizations. "Besides, the reduction in net debt by about ?2,000 crore is a key positive," said Binod Modi, analyst at Reliance Securities Ltd.
Graphic by Santosh Sharma/Mint
What also impressed analysts is the nimble-footed integration of the recently merged cement assets of Nathdwara and Century, which was a concern on the Street.
Kunal Shah, analyst (institutional equities) at Yes Securities (India) Ltd, said: "The company has proved its ability of asset integration. Century’s cement assets were ramped up to 79% capacity utilization in December, even as they operated Nathdwara generating an Ebitda of ?1,500 per tonne."
Looks like the demand weakness mirrored in weak sales during the quarter was masked by the deft integration and synergies derived from these acquired assets. This drove UltraTech’s stock up by 2.6% to ?4,643 after the Q3 results were declared on Friday.
Brand transition from Century to UltraTech, which is 55% complete, is likely to touch 80% by September 2020. A report by Jefferies India Pvt. Ltd highlights that the Ebitda per tonne for premium brands is about ?5-10 higher per bag than the average (A cement bag weighs 50kg). Of course, with competition increasing in the arena, it remains to be seen how brand premiumization in the cement industry will pan out. UltraTech Cement scores well among peers here.
However, there are road bumps ahead for the cement sector and for UltraTech. Falling gross domestic product growth, fiscal slippages and lower budgetary allocation to infrastructure sector are making industry houses jittery on growth. Although UltraTech’s management is confident that cement demand is looking up, sustainability and pricing power remains a worry for the near term.