Goldman Sachs believes near-term demand is likely to be weak due to monsoons, which could lead to seasonal weakness in prices but it remains structurally positive on the medium-term demand and supply outlook (especially after monsoon).
Goldman Sachs is positively surprised with recent rise in cement prices despite no major increase in demand during May.
The brokerage house believes near-term cement demand is likely to be weak due to monsoons, which could lead to seasonal weakness in prices but it remains structurally positive on the medium-term demand and supply outlook (especially after monsoon).
Historically, the March quarter is strongest for cement demand, while September is the weakest.
According to the brokerage firm's note, a normal monsoon is likely to be positive for 2H demand, as it is likely to revive rural housing demand (30-35 percent of total demand) that been a key overhang on demand for the last 12 months. Even in Union Budget 2016, there was significantly higher allocation towards rural spending should also address the issue of weak rural housing demand.
Additionally, it believes demand growth will be aided by better infrastructure-related cement consumption and forecasts 7 percent YoY demand growth in FY17.
Even government's focus on infrastructure (roads, railways, metros) and housing for all by 2022 is expected to help cement demand grow 9 percent CAGR in FY16-19, says Goldman Sachs, which expects limited capacity additions as land acquisition remains a key bottleneck.
As per cement dealers, in north, cement prices rose by Rs 20-30 per bag in the last week and on west side, prices in Maharashtra / Gujarat increased by Rs 5 per bag.
In south, prices in Hyderabad climbed Rs 30 per bag in the non-trade segment in the last 2-3 weeks while Bengaluru prices rose Rs 15 per bag. Prices were flat in Chennai. Dealers expect further firming up of prices in the near term. Prices in east were stable compared to May.
In cement space, Goldman Sachs has retained buy on Grasim with target price of Rs 5,300 as it is trading at a 44 percent discount to FY18 NAV. It believes that is not justified as it expects a pick-up in its key businesses (cement/VSF).
Among the pure-play cement companies, the brokerage prefers UltraTech Cement on its capacity leadership, strong earnings growth, ability to grow inorganically. It has buy rating on the stock with target price of Rs 3435.
Key risks for both companies are higher-than-expected coal/freight costs and low VSF prices, it says.
Posted by Sunil Shankar Matkar