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Cement demand set for a take-off

Published

7 years ago

October 31, 2017

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Vaibhav Agarwal of PhillipCapital reviews the 3rd quarter results of ACC Limited and Ambuja Cements. Both the companies, part of the same Group, paint a different picture.

ACC Limited and Ambuja Cements – the two Indian units of building materials manufacturer LafargeHolcim – have posted their Q3 results. ACC’s Q3 numbers have surprised positively, while Ambuja’s operating results in Q3CY17 were marginally below estimates.

ACC: Breaks the trend of disappointment in Q3
ACC breaks the trend of disappointment in Q3 which was a much-awaited development. Operating results beat our estimate by 19 per cent; consensus by 10 per cent. Volume growth remains robust (+18 per cent YoY; -11 per cent QoQ) driven by expansions in East India and buoyant demand in this region. We reiterate, rather than the growth numbers, trends of absolute volumes will hold more meaning from here-on for the sector.

Cement realisations improving sequentially (+1 per cent) was a key positive surprise. We had expected the cement realisations to correct by 3 per cent which has not happened. This should mean positive surprises in operating results of other cement companies as well. We had been highlighting in our previous notes that a positive surprise in Q3 by ACC will be a much-awaited development for ACC to rerate. This has happened in Q3CY17.

Also, any further news flow with regards ACC/Ambuja merger will be a further positive sentiment trigger. Our checks suggest strong possibility of a reverse merger of Ambuja with ACC as the transaction cost in this scenario should be lower. This is because the number of mining leases with Ambuja is lower than with ACC. The bottlenecks (1) playoff between high transaction cost and synergies of the merger and (2) making the parent’s Board (at LafargeHolcim) understand of these merger synergies and get their approval to execute this merger despite the high transaction cost. Despite valuing ACC at 16.0x EBITDA (peak multiple factoring in the possibilities of merger of ACC/Ambuja) we see limited upside given the stock price run-up. We continue to maintain Neutral with revised PO of Rs 1,950 (vs Rs 1,725 earlier).

Key highlights: ACC’s Q3 numbers have surprised positively driven by stable realisations and better than expected volume growth. EBITDA/tonne at Rs 592 was 12 per cent higher than what we expected. There were cost increases but no fall in cement realisations helped ACC partially offset the cost-push impact. While realisations were 5 per cent better than expected, costs were 6 per cent higher than our expectation, largely nullifying the impact. We are not changing estimates.

Outlook and valuation: ACC should hold on the operating performance in Q4 to sustain its rerating. Merger news flow, if any will also be a positive trigger but more sentimental in nature. A much awaited trigger in our opinion (and as per our ground checks) will be the brand consolidation which can structurally help both companies deliver material cost savings in distribution channel. Given the stock price run-up, despite factoring the peak of valuation multiples, we see limited upside in ACC from here-on. The stock currently trades at $155/tonne and target it will trade at $170/tonne. ACC continues to command significant discount to peers on EBITDA/tonne and this must improve for meaningful upside.

Ambuja: Marginally below estimates, most positives
Ambuja’s operating results in Q3CY17 were marginally below estimates despite adjusting for one-offs. EBITDA was 8 per cent /5 per cent below our/consensus estimates. Eight volumes were in line; realisations were better, but higher-than-expected opex/tonne took toll. While we have seen better realisations converting to better EBITDA/tonne for other cement majors, Ambuja disappointed on this front.

EBITDA/tonne was Rs 691 (adjusted) – 7 per cent below our estimates. We have cut our volume estimates for Ambuja by 5 per cent resulting in cut in EBITDA estimate of 8 per cent / 7per cent for CY17/18.

In our opinion, improving the efficiencies and operating parameters of ACC will remain Ambuja’s immediate focus. However, if Ambuja starts disappointing on a standalone basis, it will hurt consolidated numbers (unless ACC structurally improves on operating parameters). ACC’s surprise in Q3CY17 was more realisation-driven, and we are yet to see structural changes in operating parameters. Given the stock price run-up and cut in our estimates, we downgrade Ambuja to Neutral from BUY. We value it at par with peers at 16x EBITDA, despite which we fail to see any meaningful upside.

Key highlights: Ambuja’s performance in Q3 was marginally lower than expected, driven by higher opex. Though this is not a major disappointment yet, if Ambuja fails to convert better realisations into better EBITDA/tonne (like its peers), the stock performance may remain subdued. CY18 will remain a ‘consolidation phase’ for Ambuja, and hence, safeguarding standalone performance is the key to protect its valuation.

Merger-related news flow (with ACC) will be a sentiment-based trigger, but a more important trigger will be brand consolidation, which can add synergies of Rs 2-3 billion in the distribution channel, as per our ground checks.

Outlook and valuation: Given the stock price run up, we are downgrading our rating to Neutral. Despite valuing Ambuja at par with its peers, we do not see any meaningful upside here. Bringing Ambuja’s operating performance (at a consolidated level) in line with the operating performance of its peers will be a key challenge for meaningful upside. We have valued Ambuja at par with its peers (ACC / UltraTech) at 16x EV/EBITDA. We revise our target to Rs 300 (vs Rs 290 earlier).

Cement demand
The government’s reiteration for spends on housing / infrastructure segment augurs well for the cement sector. Recapitalisation of PSU banks should have a trickle-down effect on the construction sector. The numbers shared by the Finance Minister in his recent presentation indicate an incremental cement demand of over 100 MT (cumulative) over the next five years, which translates to a minimum demand CAGR of over 8 per cent.

Housing alone will consume 75 MT of cement with the government’s target to build 22 million houses in three to five years. Road projects can add another 25-30 MT of demand. Thus, just housing and road construction can add 100 MT of cement demand over the next five years, which is sufficient for a +10per cent uptick in utilisation. Construction of other infrastructure such as airports, ports, and railway network will also help. We expect the industry utilisation to touch nearly 85 per cent (pan-India level) over the next 3- 5 years if the government delivers.

Housing and roads – How can it translate to demand?
Our recent ground checks in various regions of the country suggest positive traction in demand, except for few specific states that continue to remain hit by sand shortage (situation should improve in Q3).

Every house (built in the affordable housing category or PMAY) consumes about 70 bags of cement (3.5 tonne). At 22 million houses, it converts into an incremental demand of 77 MT. This also converges with the criteria that every square feet of construction requires 25kgs (half a bag of cement). At 70 bags, the size of such houses translates to just about 140 square feet. The actual sizes of the houses can be much larger, hence this incremental demand has an upside potential. For every 1,000 km two-lane road, the benchmark consumption is about 1 MT of cement. Of the 83,000 km of road, even assuming just 30 per cent of these would be concrete roads, the consumption will be minimum 25 MT.

Hence, it appears that the cement sector will see a demand growth of at least 100mn tonnes. These assumptions are in base-case scenarios (small houses of only 140 sq ft each and just 30 per cent of the roads being concrete). This translates to a minimum CAGR of 8per cent over the next three to five years.

What changes in the sector outlook
With demand outlook turning positive, we are likely to see a much-awaited ‘sentiment change’ in the sector, which will drive valuations. Entering a pre-election era – we are more confident about improving demand as government spends usually increase.

Although the growth numbers may not look very robust in percentage terms, incremental demand will support capacity utilisation. We expect a minimum incremental Rs100/tonne of scale benefits, excluding the cost push impact. Challenges
Given that most of this demand will be from government and infra-related projects, the industry may lack pricing power. Marginal upticks in pricing (say 4-5per cent ) are likely, in line with increasing capacity utilisations. Robust price upticks are unlikely.

Top picks
We continue to believe that mid-caps still offer quite a lot of value. Our top mid-cap plays are India Cements, JK Lakshmi Cement, and JK Cement. Among large-caps, we continue to like UltraTech Cement and Dalmia Bharat. Both these companies have structural triggers for another leg of re-rating. With their valuation discount, mid-caps will continue to outperform large-caps in terms of returns.

The article is authored by: Vaibhav Agarwal, Vice President, Cement & Corporate Access, Institutional Equity Research, PhillipCapital (India) Pvt. Ltd.

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Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings

Published

3 years ago

October 21, 2021

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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).

Source:moneycontrol.com

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Wonder Cement shows journey of cement with new campaign

Published

3 years ago

October 21, 2021

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The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…

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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.

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In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)

Published

3 years ago

October 21, 2021

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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

UltraTech Cement
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.