As expected, prices were under pressure across the country during August given monsoon. Further wet spells in September did not help, but cement makers have been able to wriggle out higher prices YoY.
North (+9.5 per cent), West (10.5 per cent) and South (11.6 per cent) saw the highest YoY price increases in August. South remains interestingly poised. Sharp increases in prices (in mid-June) will help companies improve their dismal profitability, though volumes will remain constrained. South needs prices of Rs 330/bag on an average to return to its historical peak profitability (seen in 1HFY12, refer page 4). Further price hikes are therefore imminent. However, the fact that some of the AP players are selling for approximately Rs 220-230 in Orissa (vs headline pricing of Rs 290 in AP itself) is not an encouraging sign. DIPP reported volume growth of approximately 16 per cent in July. August may see some tapering down in the growth rate as monsoon gathered steam across the country. Cement market participants sounded positive on the future outlook and believe demand is likely to pick up once dry spells commence. In South, government formation exercise is yet not complete in AP/Telangana and we expect a completion will provide some fillip to the demand.
Outlook
Cement makers have managed to ride the wet spell with a better YoY pricing and likely higher volumes. As such, profitability will be markedly higher YoY in 2QFY15 (vs Rs 536/t in 2QFY14 for our coverage universe). Apart from the worrisome trend of low pricing by AP brands in Orissa, pricing in South seems tenuously stable, with industry looking at price hikes especially if there is any demand traction. The strong growth in 4MFY15 (11.1 per cent YoY as per DIPP) is very likely attributable to the release of pent up demand resulting from post election optimism.
Valuations and view
There can be approximately 7.5-9.3 per cent growth for companies in FY15, with higher volume gains for companies adding capacities and operating in non-surplus regions. However, valuations (10-13x 1yr Fwd) continue to factor in much aggressive numbers, and are thus susceptible to negative surprises.
So, are good days back in South?
Ramco (then Madras Cements) and India Cements generated their peak EBITDA/t (approximately 1,300/t for Ramco, approximately 940 for India Cements) in 1HFY12, aided by high and stable prices across the region.
This is in contrast to UltraTech, a pan India player, which registered an EBITDA/t of approximately 900/t and Shree Cement, focused on North/Central, which reported approximately 840/t despite having a better cost structure than India/Ramco. As a result, Ramco also had its RoE/RoCE peak in FY12, since it enjoyed consistently high prices in South. We believe Ramco?s profitability to be a good indicator of the way prices are likely to head in South, especially when supply gets constrained. Quick calculations on the current cost structure of Ramco imply an average realisation of Rs 330/bag across the region for profitability to hit the Rs 1,300/t peak that it scaled in FY12.
Despite the euphoria around price hikes in South, prices there are in fact pretty much the same as they were in 1HFY12, with costs having gone up 23 per cent vs the same period. (Rs 2,990/t in 1HFY12 (Rs150/bag) vs Rs 3,684/t (Rs 184/bag) LTM) Given that the current prices are still lower than these levels, there can be further hikes in the region to offset costs. If prices do not rise steeply, valuations of key players will be rendered extremely vulnerable.
Cement price
Prices declined by Rs 15-20/bag across North and Central. Declines were sharper in the non-trade category. While remaining high, prices in South are under pressure. Hyderabad prices corrected approximately Rs 20-25. AP based brands are selling for as low as Rs 220-230 in Orissa.
East prices remained largely unchanged except in Bihar, where heavy rains have put pressure on cement makers. Slow demand has put pressure on prices in Maharashtra, down approximately Rs 20-25 in August. Gujarat prices also slipped, but hikes totaling Rs 25 have been announced for September.
There can be approximately 7.5 – 9.3 per cent growth for companies in FY15, with higher volume gains for companies adding capacities and operating in non-surplus regions.