Prices start inching up as construction season sets in
After falling 2.61 per cent in December 2018 from the lifetime peak of 2054.7 points, the ET Cement Index that tracks domestic cement price movements bounced back by 2.35 per cent to 2048 points in January 2019, mostly on the back of beginning of a new construction season. The index is unlikely to rebound from here with the lifetime peak just seven points away and several cement industry majors are still opting for building higher volumes to hiking prices. If it breaks out of the life peak and continued its journey upwards for a couple of months in succession we can say there is a secular upward trend in prices.
Sandeep Dubey, Lead Analyst - Research, Edelweiss Broking Limited, who prepared a report on various issues impacting the cement industry based on his interactions with various stakeholders at the ICR Cement Expo 2018 held in Hyderabad on December 20-21, 2018, said, 'While many players who attended the conference were of the view that FY19E (2018-19 Estimate) demand will grow by 7-8 per cent, they believe that demand is expected to outpace GDP growth, going forward. Subsequently, the per capita cement consumption will inch up to 300 kg by FY21E.'
Management of South-based companies expect Andhra Pradesh (AP)/Telangana markets to continue growing at over 15 per cent, primarily led by strong demand emanating from the government-led infrastructure and irrigation projects. Maharashtra market is expected to grow at 10 per cent, while Karnataka region is expected to grow at 5 per cent. On contrary, the companies foresee subdued demand in Tamil Nadu and Kerala market on account of lower construction activities and low availability of sand in some regions, Dubey added.
Commenting on the UltraTech Cement results for the quarter ended December 2018, Vaibhav Agarwal of PhillipCapital India said that though their operating numbers have beat their/consensus numbers by 4 per cent/1 per cent respectively, absence of pricing power vs. peers visible in Q3 numbers was the only key concern for the company. That means UltraTech Cement did not participate in the recent price hikes effected by cement companies.
In fact, UltraTech has been pushing volumes for quite a while instead of hiking prices of its products in the process of assimilating Binani Cement, which it has acquired under insolvency process a few months back.
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 in a report.
'FY19 (2018-19) 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 per cent. '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 CLSA 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 some 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 per cent 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, said Maheshwari.
RISE IN PREMIUM
'Of late, pricing discipline is a result of joint effort by both small cap and large cap players and it's bound to increase amid the busy construction season which will start from January 2019 onwards. As an alternative, cement companies have been trying to increase the share of their premium category,'says Dubey.
Traditionally, housing sector comprises 60-65 per cent of total demand while infrastructure took the backseat with merely 30 per cent of demand. Of late, roads and infrastructure segment has gained huge traction with multiple projects being executed in smart cities, airports, metro projects, sea ports and affordable housing segments, acting as a new trigger. 'Share of bulk cement has shot up to 20 per cent from mere 5 per cent (in FY2013). Ready Mix Concrete (RMC) demand has picked up significantly on the back of humongous demand arising from metro projects, mass housing projects, and high-rise residential projects,'according to what Dubey gathered from the stakeholders.
Southern region is witnessing divergent
demand with Andhra Pradesh/Telangana persistently growing robust, while Tamil Nadu still facing the heat of sand mining ban (as per managements), despite the advent of mechanised sand, says the Edelweiss report.
- BS SRINIVASALU REDDY