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MOSL: CEMENT-Price hikes continue; 4QFY20 outlook strong; Further price hikes initiated in Feb

CEMENT: Price hikes continue; 4QFY20 outlook strongCEMENT: Price hikes continue; 4QFY20 outlook strong

** We expect cement sector margins to be strong in 4QFY20 as price hikes have resumed in CY20 (after trending down in 2HCY19) and costs have been declining.
** According to our channel checks, prices have continued increasing in CY20, led by hikes in south in Feb’20. All-India cement prices are up ~4% QoQ (+6% YoY) so far this quarter.
** Regionally, on a sequential basis, prices are up ~6% in east, 5% in north, 4% in central, 3% in west, and 1% in south (led by sharp hikes in Andhra Pradesh and Telangana).
** Moreover, after falling in 3QFY20, costs are likely to decline further this quarter, led by lower energy costs and operating leverage benefits from seasonally higher volumes. 
** We reiterate our preference for companies with higher exposure to north and central India. UltraTech is our top large-cap and JK Cement our top mid-cap pick. We also like ACC as a value pick.

South – another attempt to raise prices ** Cement industry in south has attempted a sharp price hike again in Andhra Pradesh and Telangana (AP&T), with prices being raised by INR60-70/bag (25-30%) in Feb’20. A dispatch holiday was also taken in the first week of Feb’20 to support the hike.
** Prices in AP&T have been very weak in 2HCY19 (down by ~30% to INR90/bag) due to weak demand. Industry has been trying to raise prices nearly every month over the past 4-5 months but has not been successful.
** South was the only region in India to not see a price hike in Jan’20. In fact, prices were down 2% MoM in the month due to lower prices in Kerala. Prices have been raised by 7% MoM in Feb’20, driving up all-India average price growth.
** Prices in south, however, are down by 5% YoY on account of a high base (Feb’19 had witnessed price hike of INR60/bag in south). On a sequential basis, prices are up 1% QoQ in the region.