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Industry volumes up 12% in Q3FY18

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Edelweiss Research expects strong volume growth trend to extend into Q4FY18 as well, aided by low base and foresee margins to improve.
Majority of our coverage companies reported volumes ahead of estimates, while realisations belied our forecast, making it the underlying theme for Q3FY18, said Edelweiss Research in its Q3FY18 (October-December 2017 quarter of 2017-18) Earnings Review. Except for UltraTech Cement (UTCL, undertook maintenance shutdown for the acquired JP Associates’ assets), EBITDA of coverage companies surpassed estimates on controlled costs, said the authors lead by Prateek Parekh. While variable costs per tonne stood largely in line, drop in other expenses aided out performance.
Adjusted for acquisitions, volume of our universe grew approximately 16 per cent YoY versus approximately 12 per cent YoY for industry. UTCL surprised the most with approximately 17 per cent YoY (versus (versus estimate 8 per cent) volume growth (adjusted for JP Associates’ acquisition) followed by ACC (27 per cent versus 20 per cent estimate), implying increase in market share. We expect this strong volume growth trend to extend into Q4FY18 as well, aided by low base and foresee margins to improve (despite further jump in fuel cost) following improvement in realisations owing to busy season. We remain positive on industry in view of rising clinker utilisation rates. UTCL and India Cements are our top picks. Key highlights: Net sales (up 30 per cent YoY) were ahead of our estimate on strong volumes. Low base (down 9.2 per cent YoY) in Q4CY16 along with ramp up of new plants at Jamul and Sindri (commissioned in September-October 2016) led to 27 per cent YoY growth in volumes. However, net realisation at Rs 4,569 per tonne, dipped 3.5 per cent QoQ versus our estimate of 1.5 per cent drop. Reported EBITDA of Rs 4.4 billion, surged 55 per cent YoY and surpassed our estimate of Rs 3.5 billion. EBITDA per tonne stood at Rs 528 versus Rs 409 in Q4CY16.Key highlights: Q3FY18 numbers are not comparable with Q3FY17 as last year numbers do not include the recently merged Aditya Birla Nuvo’s (ABNL) financials. VSF revenue (including VFY from ABNL) rose 24 per cent YoY led by 13 per cent growth (9 per cent excluding VFY) in volumes and 10 per cent in realisations (flat QoQ). VSF’s EBITDA stood at Rs 4.6 billion, up 15 per cent YoY with margins of 21 per cent compared to 23 per cent in Q3FY17 and 22 per cent in Q2FY18. Chemical volumes (including ABNL) were up 17 per cent YoY with realisations growing 22 per cent YoY (up 16 per cent QoQ). Consequently, chemical margin rose 300bps QoQ to 27 per cent (20 per cent in Q3FY17). Standalone EBITDA of Rs 8.7 billion stood ahead of our Rs 7.4 billion estimate.Key highlights: Net revenue of Rs 12.1 billion (3 per cent below our estimate), dipped 4 per cent YoY on flat volumes YoY and 5.5 per cent QoQ drop in realisations. However, significant reduction in fixed costs (down 24 per cent YoY) due to managements efforts to close unviable divisions, manpower rationalisation (and related policy changes) and controlled overhead and (and related policy changes) and controlled overhead and advertisement expenses aided EBITDA beat in Q3FY18. Reported EBITDA at Rs 1.7 billion, down 19 per cent YoY, was ahead of our Rs 1.4 billion estimate. Blended EBITDA/t stood at approximately Rs 614 (down approximately 19 per cent YoY) versus our Rs 507 estimate.Key highlights: Net revenue (up 24 per cent YoY) was ahead of our estimate, led by grey cement segment that clocked strong performance. Grey cement volumes rose 18 per cent YoY (versus our estimate of 15 per cent), while blended realisation dipped just 3 per cent QoQ (versus our 1 5 per cent estimate). Total volumes, including clinker, grew ~22 per cent YoY – a good number given the Supreme Court’s (SC) ban order on sand mining in Rajasthan. Led by lower than estimated realisations, grey cement EBITDA/t stood lower at Rs 376 (down 16 per cent YoY) compared to Rs 414 estimate. White cement + wall putty volumes grew 12 per cent YoY with realisation growth of 3 per cent QoQ. Segment EBITDA at Rs 941mn, dipped a mere 2 per cent YoY despite the company switching to costlier fuel LDO (2.5x costlier than pet coke) following SC’s ban on usage of pet coke in Rajasthan for almost half of the quarter.
Blended EBITDA/t stood at approximately Rs 676, down 12 per cent YoY and ahead of our estimate of Rs 627.Key highlights: Net revenue (up 23 per cent YoY) came in line with our estimate with pure cement volume jumping 9 per cent YoY with realisation dipping 0.7 per cent QoQ (in line). Including clinker, total sales volumes grew 8 per cent YoY. On cost front, while variable cost/t was in line, other expenses at Rs 3.2 billion (Rs 3.6 billion after adjusting Rs 403 million of DMF reversal), down 15 per cent YoY, came in much below our estimate of Rs 4.1 billion. Ergo, reported EBITDA of Rs 5.7 billion was much ahead of Rs 5.0 billion estimate. Cement EBITDA/t stood at Rs 1,080 (Rs 1,018 in Q3FY17) and ahead of our Rs 918 estimate.Key highlights: Net revenue (up 35 per cent YoY) stood 4 per cent above estimate with volumes at approximately 15.9mt (up 35 per cent YoY and 8 per cent ahead of 14.7 MT estimate) and realisation of Rs 4,287 (down 3.7 per cent QoQ versus estimate of 2 per cent drop). On YoY basis, numbers are not comparable due to consolidation of acquired JPA assets. Excluding same, we believe volume growth was in mid-teens YoY. With inline variable cost/t and higher-than-estimated fixed cost (primarily other expenses), EBITDA/t stood at Rs 801, ahead of our Rs 937 estimate.Cement sector – Summary Positive highlights
1. Better than estimated volume growth
2. Lower than expected other expenses
Negative highlights/concerns/risks
1. Lower than anticipated realisationsTop picks: UltraTech Cement, India CementsAmbuja & ACC call off merger

Edelweiss Research expects strong volume growth trend to extend into Q4FY18 as well, aided by low base and foresee margins to improve.
Ambuja Cement (ACL) has put on hold its plan to merge with 50.1 per cent subsidiary ACC recently citing ‘some constraints’, while an arrangement to trade materials and services with ACC to maximise synergies has been approved. Both the Indian units of LafargeHolcim, however, said that merger ‘remains their ultimate objective’.
‘On the basis of a comprehensive evaluation carried out by both the special committee and Board of Directors of the company, the board is of the opinion that there are at present certain constraints in implementing a merger between the company and Ambuja Cements Ltd (ACL),’ ACC press release said.
‘In the meantime, with intention to maximise synergies between the companies and to unlock value for the shareholders, the board has approved an arrangement with ACL for mutual purchase and sale of materials and services,’ it added. ACL also made a similar looking filing with the stock exchanges. Both the stocks closed a percentage point on the day of the news break.
In a post announcement note, Edelweiss Securities Limited’s (ESL) analyst Navin Sahadeo termed the calling off of merger for now as ‘sentimental negative’ for the companies ‘as the merger was expected to expedite accrual of claimed synergies.’
‘While conservatively we had not factored in synergy benefits in our estimates, putting the merger on back burner is nonetheless disappointing as it was envisaged to expedite accrual of claimed synergies’ ESL added.
‘In our view, the currently not-so lucrative cost-benefit dynamics (tangible synergy gains versus cost of mines transfer fee and transaction cost) could have led to the development, even as we await clarity from management,’ Sahadeo pointed out.
With limited visibility on merger, ESL has valued ACL’s stake in ACC at 30 per cent holding company discount (20 per cent earlier) even as it continued to value ACL and ACC at 14x CY19E EV/EBITDA (Enterprise Value to Earnings Before Interest Taxes, Depreciation and Amortisation), while maintain ‘HOLD’ with a revised target price of Rs 280 (Rs 290 earlier).
Both the stocks posted around one percentage point gain each on the day of announcement. Both ACC and ACL became parts the Holcim group in 2005. Following the merger of Holcim Limited with Lafarge SA in 2015, a new entity LafargeHolcim was created to become the world’s largest cement producer.
Merger milestones
i) July 2013: ACEM proposes restructuring to make ACC its 50.1 per cent subsidiary. Claims synergy potential of $120-150 million for ACC & ACEM combined over two years;
ii) August 2016: FIPB approves restructuring;
iii) May 2017: ACEM and ACC set up a Special Committee to explore merger possibilities; and
iv) February 2018: Merger shelved.

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

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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

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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)

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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.

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