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MOSL: CEMENT-Demand weakness persists; cost reduction to support margins

CEMENT: Demand weakness persists; cost reduction to support margins

 UltraTech, Shree Cement, ACC, Ambuja and Dalmia Bharat - the five largest Indian cement companies - account for ~50% of total industry capacity. We thus read into the second-quarter results and commentary of these companies, along with inputs from our channel checks, to highlight the ongoing industry trends and our outlook for the rest of the year.

• Industry volumes declined ~3% YoY in 2QFY20 due to heavy rains and tight liquidity conditions. While companies expect demand to improve in 2HFY20, our channel checks indicate muted trends in 3QFY20, restricting second-half growth to ~4% YoY.
• Realizations were weak across India in the quarter, with the decline being more prominent for companies based in south/east (down 9-11% QoQ) than north/central (down 1-3% QoQ). Not much has changed even now with prices in south/east 4-5% below the 2QFY20 average, according to our channel checks.
• The cement industry was not able to benefit from the sharp decline in fuel costs in 2QFY20 due to the high-cost inventory lying with companies and nearly 45-60 days' time lag between ordering and receiving consignments. Nevertheless, with realization of the cost benefit and seasonal pick-up in demand, fixed cost absorption will likely improve, driving a cost reduction of ~INR180-200/t QoQ for the industry in 3QFY20. This, in our view, should support margins and neutralize up to ~4% QoQ decline in cement prices.