Demand up, but prices fail to catch up
Mumbai: Though cement demand is expected to grow in double digits during FY19 (2018-19) with pre-election thrust to infrastructure, the unit EBITDA (Earnings before interest, tax, depreciation and amortisation) margins are shrinking, due to prices remaining low, said the leading brokerage CLSA.
"FY19 is likely to end with near double-digit demand growth, which will also take up utilisation. This much-anticipated event, however, has been a big disappointer as prices did not see any benefit and in fact, unit EBITDA margins contracted in FY19," said CLSA’s Investment Analyst team led by Vivek Maheshwari, while trimming its FY19-21 EPS estimates for the major players by 3%-15%, in its recent report.
"Lower energy prices are a relief, but cement prices, are the key, and uncertainty prevails here, which is quite counter-intuitive in the context of rising utilisation rates," Maheshwari added. Cement price hikes is a must for stock price performance, feels CLSA.
Over the past decade, the cement industry has witnessed a decline in utilisation rates, despite which, cement prices have held up fairly well.
Stating that the industry feedback indicated that FY19 growth of 9-10 per cent has primarily come from government-led infrastructure and a boost from pre-election spending (states as well as centre), the report predicted a 7 per cent growth for FY20, "despite a tough base." Across regions, the south and east have witnessed strong growth while the west faces challenges.
Over the past several years, a weak macro weighed on cement demand which reported growth of sub-5 per cent growth over FY11-18 (FY18 growth of 8.5% is off a very low base).
Cement supply additions continued and rose 5 per cent year-on-year (YoY), but trailed incremental demand in FY19, which drove up industry utilisation by around 3 percentage points YoY to 69 per cent in FY19, the report said, while pegging the CAGR of 4.5 per cent in utilisation, given upcoming capacities.