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Cement: Q4FY19 Review - Realisations to offset temporary slowdown in demand

Cement demand strong as 4QFY19 sees 13.3% yoy growth: (All India) led by continued momentum in construction activity in infrastructure, low-cost and rural housing. In East demand was led by IHB, PMAY, low-cost and rural housing and infra segments, except in Chhattisgarh, where heavy rains and shortage of funds moderated demand. The West too saw strong demand from Maharashtra, with demand sliding in Gujarat, on weak traction from rural housing. Demand trends in North were mixed, with weakness in Punjab (panchayat elections and sand unavailability) and Himachal Pradesh (extended winters). The weakness was offset by strong demand in Rajasthan & Delhi NCR (infrastructure development), while Central saw sustained demand in Madhya Pradesh (IHB and PMAY) and Uttar Pradesh (Rural IHB and infrastructure). In South, demand momentum sustained in AP/Telangana, upheld by IHB, infrastructure and Amravati development; Tamil Nadu saw a strong pick up demand, boosted by infrastructure and rural housing, while demand in Kerala recovered on reconstruction work post floods, Karnataka saw moderate demand from commercial segment.

Long-term demand drivers intact: Near term (Q1FY20) volume trajectory has been slow due to delays in project execution caused by lack of funds, labour shortage and general elections across the country. However, with political stability, government spend towards infrastructure development, low cost housing, rural economy, etc. is likely to accelerate and provide an impetus to cement demand over the medium to long term. We believe this is likely to bode well for utilisations that have inched up to 70%+ in FY19, with some companies seeing 85%+ utilisations in 4QFY19.

Cement prices see an up move: Price hikes by cement companies in Feb-19 in South and Maharashtra has sustained. This was visible in sharp improvement in realisations for companies with South and West exposure. Other regions too attempted price hikes in Feb-19, but were largely rolled back in Mar-19 on year-end volume push by companies. Apr-19 saw price hikes of Rs30-40/bag (+12-14% yoy) across India which have largely sustained into May-19 (price hikes taken in May-19 in select regions were largely rolled back). Accordingly, we expect companies to see sharp improvement in realisations in 1QFY20.

Costs to stabilize: Most companies continued to see pressure on P&F costs led by higher petcoke prices (+6% yoy) in 3QFY19. On the other hand, freight costs declined yoy across most companies led by lower diesel prices and benefits of higher axle load. Concurrently positive operating leverage resulted in most companies seeing decline in costs on yoy basis. Going ahead, domestic petcoke prices have fallen by -12% yoy in YTD-1Q20, while diesel prices are largely stable. Accordingly, we expect costs to largely remain stable.

UTCEM our top pick: We expect sustained uptick in demand to absorb capacity additions and aid in higher cement prices and profitability of companies. UTCEM is our top pick on strong volume growth (capacity additions and acquisitions), cost efficiencies (better consumption norms, WHRS plants, GUs to reduce lead distances) as also de-leveraging to drive strong earnings momentum. At 13x FY21E EV/EBITDA and US$202 EV/tonne, the stock looks attractive (39% earnings CAGR over FY19-20E).