Cement prices in North catches cold; Central & West inch up

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Cement prices in North catches cold; Central & West inch up

Emkay Global Financial Services has come out with its report on cement space.

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Emkay Global Financial Services has come out with its report on cement space.

• All India prices at Rs269/bag remain flat m-o-m.Northern prices soften due to cold weather. Prices in East, West & Central inch up in anticipation of demand, south prices hold fort
• Marginal improvement in demand seen in certain pockets of Central, Western & Southern regions. While other regions expect demand to recover by month end
• Cost pressures to persist in Q3FY12 led by 1. Higher e-auction coal prices 2. INR depreciation leading to higher imported coal prices 3. Hike in surcharges by railways
• New (GCV based) coal pricing mechanism effectively a price hike of 28% for cement sector- intensifies cost headwinds. Estimate P&F cost to go up by Rs87/ton or 8.8%
• Solid demand pick up remains trigger for further price hikes. Remain sector NEUTRAL. Negative on ACEM, UTCEM. Keep ACC our relative preferred pick. SRCM top mid cap pick

Northern Region: Cement price trend catching cold:

• On a an average Northern region witnessed corrections of 2% m-o-m as severe cold weather disrupts construction activity leading to a price cut of Rs 5-15//bag. Demand also impacted owing to labor constraints and shorter days of working in the winter season. However in certain pockets of Punjab, prices continue to remain firm.
• We had highlighted in our earlier note that price trend in the region is expected to remain sluggish till January and our current dealer interactions suggest that bounce back in prices should be around the month of February when the construction season picks up again.

Eastern region: Producers push hikes on first signs of demand pick up:

• With just a marginal improvement in demand witnessed in West Bengal and Orissa, cement producers in the region seem to have leapt at the opportunity and pushed forth hikes of Rs 5 -10/bag. In addition West Bengal also witnessed some rollbacks of discounts given by the producers till December-11 thereby, in effect, increasing the price by Rs15/bag in regions like Kolkatta (taking prices close to the YTD
  highs).
• Even though prices in Bihar were also hiked by Rs5/bag, demand in Assam and Bihar remained almost at the same levels as last month. Thus dealers are skeptical that for any further hikes to pass through the region would have to show substantial signs of recovery in demand.

Central Region: Anticipation of demand pick up triggers price hikes:

• Cement offtake in the region remains at almost the same level as last month. However producers have hiked cement prices in certain pockets like Lucknow in anticipation of pick up in demand by this month end.
• Bhopal has already started showing some recovery in demand with dealers expecting announcements of price hike in a few days. However Bareilly remains an exception in the region where prices have reduced  by almost Rs 8-10 per bag as the demand here still remains poor.

Outlook:

The month of January-11 has witnessed prices in Northern region come under pressure as the demand was affected due to severe cold. Eastern Central and western regions saw a slight uptick in prices in anticipation of demand momentum picking up towards the month end though certain pockets have shown slight improvement in offtake over the last month. While south continues to sustain its price levels led by strict production discipline.

Cement dispatches in December grew by 14% yoy (twelve month rolling average growth at 5.4%) much as expected due to low base of last year. Though we see the market preparing for hikes in anticipation of demand momentum and also due to the extreme cost pressures escalating further after Coal India's recent pricing stunt (estimated to increase energy prices by ~28%), it remains to see whether this would be equally supported by consumption growth. Hence we believe in a scenario of sluggish demand and rising input cost pressures, the sector is unlikely to see healthy EBIDTA/ton levels of Rs1000+. The recent cement price could just be enough to cover the cost pressures without adding incrementally to EBIDTA/t from Q4FY12 onwards.

We maintain neutral stance on the sector. Prefer ACC (volume growth to help drive operating leverage and protect margins), and Shree Cements amongst mid caps (at 25% discount to ACC valuation, cement biz alone yields value of Rs2200/share implying negative value for power biz).

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To read the full report click on the attachment