Reliance Securities has maintained its positive stance on UltraTech Cement and Shree Cement in the largecap space
Demand environment continued to remain upbeat in Q1FY19 aided by sustained infrastructure activities and firm rural demand. Cement companies under our coverage universe are expected to witness a double-digit volume growth on aggregate basis.
Notably, our channel check suggests that realisation trend also witnessed a moderate improvement and realisation is expected to improve by around 2-3 percent QoQ.
Western region is expected to have witnessed maximum recovery to the tune of 8-12 percent QoQ, followed by Central and Eastern regions witnessing 2 percent and 1 percent QoQ improvement, respectively.
However, persistent uptrend in fuel and input prices is likely to nullify realisation recovery. Petcoke and diesel prices rose by 8-10 percent QoQ, which are likely to keep operational performance of the companies muted.
We expect the companies under our coverage universe to witness an average volume growth of 17 percent YoY mainly aided by robust volume growth estimated to be registered by UltraTech Cement (+33 percent YoY).
Further, average EBITDA is expected to witness de-growth of 11 percent YoY and 5 percent QoQ mainly to be impacted by higher operational cost.
Sales Volume to Remain Impressive
Led by sustained pick-up in infrastructure activities and firm rural demand, sales volume is expected to remain healthy. We expect cement companies under our coverage universe to witness average volume growth of around 17 percent YoY mainly to be supported by UltraTech Cement (+33 percent YoY).
Improved Realisation to Arrest Further Margin Erosion
While average realisation of the industry remained soft in previous year, our channel checks suggest that there was a moderate price improvement in Q1FY19 mainly owing to price recovery in Jun’18.
We expect average realisation to witness an improvement of around 2-3 percent QoQ. Notably, Western region witnessed maximum price recovery followed by Central and Eastern regions. Further, change in commercial terms for freight from ex-factory to FOB – which led to firm realisation in previous quarter – is expected to persist.
Fuel & Input Prices Remain Elevated
A persistent increase in petcoke and diesel prices along with higher input cost has been dragging the companies’ profitability over last 12-15 months.
Notably, continuing to move northwards petcoke and diesel prices surged by 8-10 percent QoQ in Q1FY19, which we believe to drag cement companies’ performance.
Looking ahead, we believe further price hike is imminent to sail through high cost scenario, as any meaningful reduction in fuel prices seems unlikely in the medium term.
Monsoon Trend: A crucial Factor to Watch Out For
A normal monsoon is utmost important to sustain the demand scenario, as rural demand has been supporting the demand environment for last couple of months.
While progress of monsoon was moderately below normal range, recent intensification of widespread monsoon across the country bodes well.
Further, the quantum of price correction in seasonal slowdown is also to be watched as any sharp correction could lead to a further deterioration in operational performance of the companies. However, we do not expect any meaningful price correction in ongoing monsoon.
Outlook & Valuation
With strong improvement in demand scenario leading to demand growth of around 7 percent in FY18 versus around 1 percent decline in first half of FY18, we believe all tailwinds are in place to accelerate cement demand.
Thus, the demand is expected to remain healthy over next 2-3 years.
However, depressed pricing environment and surge in fuel and input prices were the key headwinds for the industry. However, visible price recovery in Jun’18 is expected to aid the companies to sail through recent surge in input cost.
We do not expect any substantial price correction in ongoing monsoon.
Further, likely price uptrend post monsoon is expected to result in better operational performance.
Notably, incremental demand from proposed “Housing for All” scheme and construction activities of Metro/Irrigation projects are likely to aid utilisation and profitability of the industry in the long-term.
We further believe that incremental demand will be higher than incremental supply over next 3 years, which is expected to aid pricing recovery.We maintain our positive stance on UltraTech Cement and Shree
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