Motilal Oswal's research report on Cement space
Ministry of Power (MoP) has proposed competitive allocation of linkage coal for the non-regulated sector.
We believe the auction of existing linkage should impact cement players. But current fuel price dynamics of imported and pet coke favor switching to these alternate fuels in kiln if linkage prices go up. However, dynamics of linkage coal is favorable in captive power plant (CPP).
Regional dynamics are naturally different, with plants in East and Central India likely to have the cost advantage on linkage.
We note the usage of pet coke having meaningful cost benefits in most regions. Our basic analysis on pet coke demand-supply (both globally and in India) highlights sustainability to remain unaffected in the foreseeable future.
"Our positive outlook on cement sector is based on (a) revival of volume growth to 8-10% CAGR over FY16E-18E, (b) slowing down of capacity addition to boost industry utilization to 80%/85% by FY17E/18E (v/s 70%/72% in FY14/15E), (c) increasing consolidation and (d) moderation of cost push. Acceleration of the investment cycle, which is essential for higher demand growth and sustenance of robust pricing, is yet to materialize. However, government’s strong emphasis on infrastructure projects augurs positively for a gradual revival of demand cycle. We continue to prefer players with strong volume levers, efficient operations and healthy balance sheet (or deleveraging visibility). We like UltraTech among large caps, and JK Lakshmi, Dalmia Bharat and JK Cement among mid caps", says Motilal Oswal research report.
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