The prices are showing signs of improvement along with volume growth. It is a silver lining by the year end. Better pricing and market penetration will improve overall sentiments for few companies, says Vaibhav Agarwal, Vice President - Research of PhillipCapital (India) Pvt. Ltd.
Earnings for cement companies in Q4 will be driven by volume growth. Prices have recovered (Rs25-30/bag) in many markets but prices continue to remain volatile in almost all regions. It is unlikely that we will see an average price hike of more than Rs15/bag for any of the regions in Q4. In most cases we expect realisations to improve by Rs7-10/bag. However, volumes have grown at robust growth rates across most regions. Even states such as Andhra Pradesh where we have seen a sluggish demand scenario for long, have reported +50 per cent M-O-M growth rates over the last couple of months. Data published by government agencies suggest Y-O-Y volume growth of ~9 per cent and 14 per cent in Jan’16 and Feb’16, respectively. March’16 volume growth may be a bit lower than earlier two months but the growth is expected to continue to be at robust levels. Volumes for the industry as a whole in Q4 are expected at +8% Y-O-Y.
Having said that, incremental benefits with scale efficiencies with higher and better volume growth will now remain marginal and may not have huge implications on operating earnings of cement manufacturers. It is high time that the industry falls in alignment and understands the importance for better prices in order to improve profit margins. If this happens, the industry will capitalise on a rare opportunity to deliver a comeback in earnings. Even if the industry is capable of delivering a mere incremental Rs20-30/bag improvement in average realisations in FY17, industry can easily surpass the benchmark of Rs1,000/tonne EBITDA mark. Given the ongoing consolidation moves and the improving demand sentiments, this should not be a tedious task.
Regards Q4 earnings, consolidated earnings of our coverage universe is expected to deliver a revenue growth of 14 per cent Y-O-Y; 13 per cent Q-O-Q, EBITDA growth of 6 per cent Y-O-Y; 21 per cent QOQ and PAT growth of -10 per cent Y-O-Y; +64 per cent Q-O-Q. Notably, despite the robust volume growth of +8 per cent for the sector, the EBITDA is moving on by only 6 per cent. EBITDA/tonne for most cement companies will continue to remain lower/flattish on Y-O-Y basis. What this means is that the recent price improvements have not been an ‘add-on’ factor to earnings, it is just a partial recovery of earnings. If the industry is able to deliver a Rs20-30 price improvement in FY17, even with say 6-7 per cent volume growth, earnings will rebound much stronger than what the industry will deliver with 8 per cent volume growth in Q4. In the current scenario, there is no alternative other than ‘recovery in cement prices’ for the industry to recoup on earnings.
Top picks for the sector continue to remain manufacturers such as UltraTech Cement, Dalmia Bharat & JK Cement. These picks are driven by their ability to deliver relatively higher volume growth at a time of demand recovery and having the first mover advantage vis-à-vis peers.