Brokerage house Motilal Oswal expects cement sector margins to be strong in the fourth quarter as costs decline and price hike resumes in the calendar year 2020 after trending down in the second half of the previous year.
According to its channel checks, prices have continued to go up in CY20, led by hikes in the south in February. All India prices are up around 4 percent QoQ (up 6 percent YoY), so far, in this quarter.
The brokerage said the cement industry in the south has attempted a sharp hike in Andhra Pradesh and Telangana (AP&T), with prices raised by Rs 60-70 per bag (25-30 percent).
Prices in AP&T were down 30 percent to Rs 90 per bag in the second half of CY19 due to weak demand. The industry has been trying to raise prices nearly every month over the past five months but has not been successful.
Prices in the north--in Punjab and Rajasthan--increased marginally in February after a Rs 15 per bag hike in January. Prices were up 5 percent QoQ and 16 percent YoY.
"While the region has seen capacity addition by JK Cement, this is expected to ramp up gradually and not disturb the market balance given more than 80 percent utilisation," said Motilal Oswal.
Prices in central India increased by Rs 5 per bag in February after a Rs 10 per bag hike in January, and were up 4 percent QoQ (and 13 percent YoY). Non-trade prices in the region also increased by Rs 25 per bag in January.
The brokerage believes that north and central India markets were best placed structurally as they had achieved a high level of consolidation with utilisation at around 85 percent already. "Prices in these regions should continue to fare better," it said.
It prefers companies that have an ability to gain market share, are moving down the cost curve and provide valuation comfort.
"Therefore, UltraTech Cement is our top largecap and JK Cement our top midcap pick. We also like ACC as a value pick. We do not see much upside in Shree Cement and Ramco, as their potential market share gains over the next three years are already priced in," Motilal Oswal said.
CY20 has also started on a positive note for the east, with prices up 8 percent year-to-date (and 6 percent QoQ) driven by Rs 20-30 per bag of hike in January as the demand is best in the country, growing over 10 percent YoY led by affordable housing projects, etc.
However, the brokerage expects prices in the east to remain volatile, given around 25 percent capacity expansion by various players, including Shree, over the next 18 months, which will likely create a fight for market share.
Dalmia Bharat recently commissioned its 3mtpa clinker in Odisha and will commission 5.2mtpa cement grinding units over the next nine months.
Prices in Mumbai have risen around 7 percent (Rs 20 per bag) year-to-date, led by hikes in January.
Prices in Ahmedabad have increased by Rs 10 per bag from those in December 2019. Prices in the west are higher by 1 percent YoY and 3 percent QoQ.
Cement demand has started recovering from December, with volumes now growing by 3-5 percent YoY, as against a decline of 2-3 percent in first half of FY20.
"We expect growth to improve to 6 percent in FY21, supported by a low base," said the brokerage, which expects cost tailwinds to continue as it expects further decline in power and fuel costs.
Power and fuel costs declined by Rs 50-70 per tonne for most cement companies in the third quarter on account of lower petcoke prices (down 20 percent to $68 per tonne in 2HCY19).
"Given about two months’ lag in realisation of import petcoke prices for Indian cement companies (due to inventory and transit time), the full benefit of lower prices is expected to be realised in Q4FY20. We expect further Rs 30-40 per tonne QoQ reduction in power & fuel costs for the cement industry, which should be supportive of margins," Motilal Oswal said.
"While petcoke prices have increased by around 5 percent MoM in February, it should not be too inflationary in the near term (for Q1FY21)," it said.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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