Economy & Market
Prices up in east India, but will they sustain?
The price increase can be attributed to better demand in Bihar, Jharkhand and Chhattisgarh. The improvement was observed both in the individual housing sector and government projects. The price of cement in the eastern region went up by Rs 10-30/50kg bag in March. This is certainly good news for cement producers. However, it is going to be short lived, considering the capacity addition in this region.
The price increase can be attributed to better demand in states such as Bihar, Jharkhand and Chhattisgarh. The improvement was observed both in the individual housing sector and government projects. Demand scenario in this region has been relatively better due to which cement makers are happy, but analysts feel the increase in prices may not last long. Many large-cap and mid-cap companies have significant market share in the eastern region along with new entrants like Emami which commissioned a new plant recently. More capacity will be added by a few more players like Shree, JSW, etc., in the coming years. Therefore the price hike, as opined by Rakesh Tarway, Head of Research at Reliance Securities Ltd., may not be sustainable. Regarding demand, Elara Capital (India) Pvt Ltd says that eastern India is poised to witness a sizeable spurt in demand, because of the gover-nment's 'Housing for all' scheme.
The balance between demand and supply will ultimately determine how prices behave. Ravi Sodah, an analyst at Elara Capital, expects eastern India to see a 58 per cent increase in capacity over FY15-20E, compared to the all-India average of 17 per cent. Under pressure Given the evolving demand-supply situation, cement prices could come under pressure and it is premature to conclude that the increase in cement prices in eastern India is sustainable. Damage controlled The retail sector of cement is yet to improve compared to the normal levels, after the shock of demonetisation.
Pan-India companies like ACC Ltd and Ambuja Cements Ltd experienced a 9 per cent year-on-year (y-o-y) decline in volumes; UltraTech Cement Ltd saw a 2 per cent y-o-y fall. Southern manufacturers like Dalmia Bharat Ltd (36 per cent y-o-y), India Cements Ltd (22 per cent y-o-y) and Orient Cement Ltd (19 per cent y-o-y) saw strong volume growth, benefiting from improved institu-tional demand in Andhra Pradesh and Telangana. As a result, on an overall basis, cement companies reported a flat volume growth at 37 million tonnes (MT) in the third quarter. Demand as well as profitability took a hit because the price of pet coke went up by Rs 400-500 per tonne in the last quarter.
Over the past two months, the impact of demonetisation has subsided and the demand scenario is showing signs of improvement, but it remains below normal levels, especially retail demand. Though the shares of large-cap cement companies have recovered from where they were when demonetisation was announced and are currently trading at rich valuations, given these concerns, March quarter earnings would be lacklustre, indicating that valuations need to correct.