Cement Market Outlook: A strong quarter in the offing may fuel these cement stocks, Emkay Global reports
A robust quarterly performance of the cement market would definitely have its positive impact on the cement counters like ACC, Ambuja Cement, Ultratech Cement, Ramco Cement, Shree Cement etc.
Cement demand likely to grow 8% in FY20: Report
ACC's net profit drop by 20% to Rs 261 crore in Q1FY17Cement prices have remained strong in the first quarter of the FY20 despite a weaker demand scenario. Though temporary discounts have been offered in most regions, companies have not reduced billing prices (barring a few places - Telangana and Andhra Pradesh). Since a good market outlook is important for the stock market investors because it has a diret connection with the industry related stocks. Robust quarterly performance of the cement market would definitely have its positive impact on the cement counters like ACC, Ambuja Cement, Ultratech Cement, Ramco Cement, Shree Cement etc. As per the Emkay Global equity research report, a robust quarter is in the offing for the cement industry.
Speaking on strong cement prices to lead to improved Q1FY20E profitability of the cement market Sanjeev Kumar Singh, Analyst at Emkay Global Financial Services said, "Our analysis suggests that average pan-India cement prices should be up 8.1% qoq (approx. 10% yoy), driven by price improvements across regions. We believe that average cement prices in North/West regions should be up 11.9%/10.5% qoq, while in other regions - East/South/Central – should be up 7.7%/6.6%/4.4% qoq. In our view, strong prices should drive steep improvement in Q1FY20E profitability, with EBITDA/ton improving between Rs170 and Rs450 for companies under our coverage universe." Apart from strong cement prices, there are some other factors that Sanjeev Kumar Singh of Emkay Global pointed out. Those other factors are sales volumes under pressure across regions and benign raw material costs.
Sales volumes under pressure across regions: Singh said that his interactions with industry participants (cement stockists, management and marketing people) indicate that cement demand has fallen in May/Jun‘19 due to factors such as higher pre-election spending, raised temperature levels and delayed monsoons.
"According to industry people, cement sales were down approx. 15% yoy in North region in May/Jun’19 and 5-10% yoy in East region (with an inventory pile-up of approx. 0.5mt in the Bihar market). Recently, demand in the South region got impacted amid sand mining ban, project cancellations in Andhra Pradesh and severe water shortage in Tamil Nadu. We expect an 8-10% yoy volume decline for most companies under our coverage universe in Q1FY20E," said Singh.
Benign raw material costs: Currently, South African coal prices are down 18% compared with Mar’19 levels. Reliance’s Petcoke prices have come down by 16% in the same period. Imported Petcoke prices from the USA and Saudi Arabia are down 2-4% from the level seen in Mar’19. We expect the benefits of lower coal/petcoke prices to become visible from Q2FY20. Diesel prices were stable in Apr/May’19, though there has been a 4% mom decline so far in Jun’19.
On his preferred picks into the stock market on the basis of these findings, Singh said, "Our preferred picks in the sector are UltraTech, ACC and JK Cement. We maintain EW position on ACC/UltraTech/Shree/Ramco Cements, while UW stance on Ambuja Cements/Grasim in sector EAP (Employee Assistance Programme). Key risks include sustenance of higher cement prices and a decline in energy/freight costs."
