Reversal in hikes, discounts queer the pitch
Following a strong hike in cement prices in February 2019, the prices have eased a bit in March with sales momentum coming under pressure from high prices and some companies resorting to heavy discounts in order to meet the year-end sales targets. The price pressures were more starkly visible in south and north regions. Typically, given the upcoming busy construction season, the first half of the calendar year being seasonally stronger period for cement consumption, cement producers have tried to fulfil their dream of hiking prices in February, despite housing sector has been facing a slowdown for a few quarters now.
The ET Cement Index that tracks cement price movements across the country was up by 1.02 per cent to 2031.7 in March 2019, after peaking to 2044.9 earlier during the month. Though prices have firmed up recently, they have eased a bit during March unable to sustain high levels.
"Average cement prices in south have moved up by 3-5 per cent month-on-month (MoM) in key cities like Bangalore (+5 per cent), Chennai (+3 per cent) and Hyderabad (+3 per cent). The hike is despite the rollback of the last price hikes which was almost instantly reversed in the same month," says Vivek Maheshwari, Investment Analyst, CLSA. However, CLSA's report said in its latest report that exit March prices were almost flat MoM in the region as discounts increased amid lower offtakes.
On the other hand, in north, east and Maharashtra (west) prices moved up 1-3 per cent MoM, while central prices were flat. Gujarat (west) prices were, however, marginally lower due to weak rural demand as well as higher inflows from Rajasthan (north), according to CLSA's March month-end report based on channel checks. Motilal Oswal Securities (MOS) report prepared based on channel checks and released in mid-March, found that on an average the cement prices across the country fell by Rs 2/bag of 50 kg each. "Region-wise, South India experienced the maximum cut of around Rs 15/bag to Rs 314. In Hyderabad, Kerala and Bengaluru, the survey showed cement prices declined by as much as Rs 20/bag against the backdrop of price hikes of Rs 30-50/bag in the previous month being led by cement makers in the south. Prices marginally declined in the east and were mostly flat in other regions."
Several factors seem to have worked in influencing this rollback in cement prices in February and March 2019, according to different analysts. Besides pressure from year-end targets leading to volume push by some manufacturers, demand is not catching up to the extent the industry players have expected it to play out, tight liquidity conditions are affecting the ability of infrastructure contractors in keeping their projects on the move, pre-election infrastructure push seems to be petering out, upcoming harvest season in several parts of the country, and in near term, labour availability is expected to be constrained by upcoming agriculture harvesting and general elections, impacting construction activity to an extent.
Dealers have indicated that the price gap between trade and non-trade continues to be quite high in several markets and there are instances of bulk supplies being diverted to the retail market.
While all-India prices increased 3 per cent sequentially in the March quarter, the recent fall notwithstanding, there's little room for cement price hikes, according to MOS. The reason: Though the demand outlook is brighter, growth may not suffice to absorb existing supply and support cement prices.
Industry players, however, are expecting that demand is likely to stay strong even in FY20 (2019-20) and the industry expects a 7-8 per cent year-on-year (YoY) demand growth or even higher if there is political stability and the current government returns to power, says CLSA report.
The consumption patterns that will emerge in the current season in the next couple of months, particularly in pre-poll season, are expected to throw some hints into the long term price trends. However, there are no supply side concerns that are expected in future, given there is excess capacity in the industry and many new capacity additions are already on the anvil.
A one per cent change in cement price impacts (CLSA) coverage earnings per share (EPS) of cement companies by 5-8 per cent in calendar 2020. Thus, cement pricing is the most critical profitability driver, according to the sensitivity analysis done by CLSA. It has identified volume growth, cement pricing, power and fuel costs and freight costs as the key variables for cement companies and the key margin differentiators across companies.
"Variable costs dominate the cement business, and hence, operating leverage is of limited significance. Freight, power and fuel are the key variable costs that form >60 per cent of total costs. However, the key is cement prices,as one per cent change impacts EPS by 5-8 per cent. Intuitively, one would expect a high correlation between cement prices with demand growth, input cost inflation and industry utilisation, but our analysis of past trends suggests otherwise," CLSA said in a report. Based on this premise CLSA has concluded that industry behaviour and discipline 'were'the key pricing drivers, which unfortunately'were'not exactly predictable and "hence, pricing volatility is here to stay."
- BS SRINIVASALU REDDY