The cement sector, hit by low demand in the last two months, is looking forward to good rains and rise in infra activities going forward, says Mihir Jhaveri, Director (Institutional Research), Religare Capital Markets told CNBC-TV18. However, he cautions that the pick up will depend on rural demand which itself is dependent on monsoon. The other catalyst for cement price recovery remains infra activities. If both these factors work, then cement market will see a recovery in the second half.
He has set a target for Orient Cement at Rs 200 per share and Ultratech Cement at Rs 3400 per share. On the other hand, Jhaveri expects JK Lakshmi and Ambuja Cement to get impacted by the price cut in the north and west India. The better markets are eastern and southern markets where prices are steady, he added.
Below is the edited transcript of Mihir Jhaveri’s interview with CNBC-TV18's Reema Tendulkar and Sumaira Abidi.
Reema: Clearly the demand environment for cement players was weak. We saw that in Q4 earnings as well where across the board most of them have reported a volume decline. What does your channel check suggest about April, May and June?
A: In April-May there was quite a bit of cut in terms of pricing, particularly in the north and the western market. The central market has also seen some price correction. The better markets probably to some extent are the eastern and southern market where prices are still holding on but as far as demand is concerned probably there is not much demand pick up across India barring a few pockets of growth. Otherwise, most of the regions are probably seeing a decline.
Sumaira: How much of a hit on profitability are you building in for Q1?
A: It is too early to say anything. Still waiting for the month to end but I believe that the north and west players could have an EBITDA burden decline quarter-on-quarter.
Reema: What is the extent of price decline in the north and west region and because of that which will be the key stocks which will be impacted which have the highest exposure to these regions?
A: The reduction is somewhere between six to ten percent in the north and the west region and clearly the concentration of north to west players some of the smaller names would be much more impacted than the pan-India players. So, the likes Shree Cement, JK Lakshmi Cement (JKLC), Ambuja Cement all these stocks may be impacted on the pricing front much higher compared to others.
Reema: That is JK Lakshmi Cement or JK Cement?
A: JK Lakshmi Cement.
Sumaira: Your top picks remain Ultratech Cement as well as Orient Cement. What is the kind of upside that you see in both stocks from here?
A: My target for Orient is Rs 220. Ultratech is Rs 3,400. Both are expanding their capacities and to some extent they are protected with being in regions where the price drops have not been there and they have been delivering good numbers as well. So, as far as volumes are concerned everybody will be impacted but pricing cushion is there. So, I see 20-25 percent upside in these stocks.
Reema: So one trend you spotted is that prices continued to remain under pressure specially in north and west. What is your sense about demand as well as volumes? In Q4 that is in the January to March it was weak. Will April and May be worse than that, would it be similar? Give us a sense of how the volumes might be for cement companies?
A: Apart from probably May where probably there was some growth in volumes. April was weak and I believe similar would be the case for June, so on a YoY basis there would be some decline for some other companies. Some companies could have growth whose capacities have come in new. So, baring those companies where the capacities are there the existing players would see a decline.
Sumaira: Cement being one of the lead indicators for the economy. How protracted do you think the recovery might be in this sector itself. Could it be that the second half of FY16 could see better demand scenario or could be even FY17 onwards?
A: Probably second half there will be some growth in terms of volumes given that the base effect is there. Secondly, it all also depends on how monsoon pans out because the rural demand has closed down. If monsoon pans out better than expected then probably you might see the rural demand picking up which would lead to some growth and on the infra side also hopefully we will see some pick up at the ground level in terms of activity. So, that is where we are building in that second half probably would be better compared to first half.
Disclosure: I don't own any of these stocks.
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