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Cement: Q4FY18 review - Demand momentum continues but margin pressures remain

Cement demand was robust in Q4FY18, led by continued momentum in construction activity in infrastructure, low cost and rural housing. Demand remained strong in East (infra and low-cost housing), West (infra projects in Maharashtra), North/Central (pick up in infra, low cost and rural housing) as also South (irrigation, housing, infra notably in AP/Telangana). Sand availability improved in UP, Bihar, Tamil Nadu due to resumption of sand mining, causing demand to improve in these regions. On the other hand, sand unavailability in Rajasthan continued to restrict construction activity. Robust demand, year-end volume push, a low base (demonization impact in Q4FY17) and consolidation of new/acquired capacities (Jamul, ACC; JPA assets, UTCEM, etc) aided strong volume growth for most companies

Long-term demand drivers intact: We expect demand momentum to continue in Q1FY19, led by continued execution of government-led infra projects, affordable housing projects as also rural demand. For FY19E, we expect demand to pick-up further, boosted by execution of key government schemes (infra, low cost housing, etc), ahead of 2019 elections. We believe AP/Telangana (infra, irrigation, low-cost housing) will continue to lead the demand in South. In West, demand is likely to be robust in Maharashtra (infra projects in Mumbai, rural spending) and Gujarat (infra projects like dedicated freight corridor, roads, etc). The momentum in East is expected to continue (sustained government spending), while we expect demand to be strong in the Northern/Central regions (pick up in government projects and construction of low-cost housing).

Cement prices improve marginally: Cement prices improved in Apr/May 2018, particularly in the West and South. In western India, prices rose by Rs12-15/bag over Apr/May post a sharp decline in Mar 2018 and have sustained thereafter. In the South, prices increased by Rs7-10/bag in Apr/May after declining in Q4FY18, but failed to sustain in certain pockets (notably Hyderabad). Prices in the North fell further by Rs3-5/bag, while prices were largely steady in Central and Eastern India. We expect prices to remain steady in near term, as muted demand during monsoons would result in limited room for price hikes.

Costs to increase on higher petcoke, diesel prices: Petcoke prices continued to rise with prices 7-8% higher qoq (+24-25% yoy) currently, which would result in higher power and fuel (P&F) costs. Freight costs too are likely to rise on higher diesel prices (+22-23% yoy).

Ultratech Cement (UTCEM) remains our top pick: We expect gradual recovery in demand with waning capacity additions to drive improvement in cement prices and thereby profitability of companies. We reiterate Ultratech Cement as our top pick, considering its strong growth profile and cost efficiencies.

Key trends in Q4FY18

• Companies reported strong volume growth on the back of pickup in demand as also consolidation of new capacities and a low base.
• Average realisations were steady qoq, as attempts to raise prices failed due to lack of discipline.

·      Costs, notably P&F and freight, continued to rise on higher fuel prices. Prices remained elevated and are likely to drive yoy increase in costs.