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.
Outlook
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.
Market Leaders
ACC
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 Cement
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.
Grasim Industries
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
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.