Vaibhav Agarwal of PhillipCapital reviews the first quarter that ended on July 31, 2017 and takes a peep into the next quarter.
In general, the cement market will see little or no improvements in Q2. It will continue to have negative demand and price corrections of Rs 200 to 400 per tonne may take place.
We suggest any stock price corrections should be considered a good buying opportunity.
While, UltraTech is hard pressed to generate volume after taking over Jaypee plants, it is also facing challenges in adopting Jaypee's distribution network. It appears to be losing its premier position after acquiring Jaypee plants. Capacity utilisations of acquired Jaypee units need to be taken up to 50 plus percent. Currently it is throttled at 25 to 30 per cent that needs to be taken up as early as possible. The timing of Jaypee's plant acquisition has not worked in its favour. Given these unprecedented challenges, we still give UltraTech the benefit of doubt and recommend buy whenever possible.
The inside information at ACC; which is a dark horse, indicates that significant changes are ahead in terms of management and strategies. Our checks suggest that the ongoing evaluation of its merger with Ambuja implies huge transaction costs in form of stamp-duty fees, transfer charges, etc. This is also a major challenge, especially from ACC's perspective for sustaining valuations.
ACC's management is focused on addressing its cost concerns. Generally the performance goes down in the second half of the year. ACC is currently trading at a 20 to 30 per cent discount to other large-cap companies. The merger between ACC and Ambuja should take place in the next 12 months. It will save distribution and manpower costs. The demand for Q2 is going to remain subdued. The issues like to GST, RERA, sand-mining needs to be handled correctly. The rural demand is then likely to pick up, while Ambuja is a play on its expected merger with ACC.
The demand pick up in the cement sector is going to happen from the rural segment. Infrastructure demand revival is still away and can be seen only in FY19. Also, next fiscal being a pre-election time, demand pull is more likely to happen. While our top pick UltraTech, we maintain our rating a wait-and-watch approach for ACC.
Considering the opportunity for acquisitions still available both organic / inorganic growth will be seen in the next two to three quarters. Sizable assets in north and west India are there for sale and could be acquired by leading manufacturers within next year. Dalmia Bharat seems to be ahead in the race as it will help the company to get acknowledged as a pan- India player. Right now the company is into a brand building exercise and pushing its volume. It has a positive sentiment among the dealer network. On the other hand, Shree Cement will continue to deliver volume growth, to touch a volume of plus 40 million tonne (+50 per cent of current capacity) by the end of FY19. It is understood that Shree Cement will start trial marketing in south region from January 2018, as it is going to commission its grinding unit in Karnataka with clinker supplied through its Chhattisgarh unit. Stock price corrections are a buying opportunity.
Though we expect near-term pain, the sector's outlook looks positive from Q3. We reiterate buy on our top picks as stated above.