Motilal Oswal Financial Services

Sector Update | 25 February 2020

Sector Update

Cement

Prices up sharply since end-Dec, but likely to taper off

We hosted a conference call with cement dealers from the east (Kolkata, WB), south

(Kochi, Kerala) and central (Kanpur, MP) regions to gauge the demand and pricing outlook

for the cement sector. Key highlights:



The trend of improving demand in December and January has weakened in February

as infrastructure work has not picked up materially and urban housing remains weak.



Demand in east though is still faring better growing at ~6% YoY in January, while south

demand continues to decline. Demand in central has been flattish.



Prices have moved up by INR15-25/bag (5-7%) YTD CY20 in east and central (led by

hikes in January), while those in south are flat due to weak demand.



Dealers across regions expect prices to correct in March by INR10-20/bag as

companies push volumes to meet their year-end targets. The attempted hikes in

February in east/central have been fully rolled back, but January hikes have sustained.



There have been concerns about new capacities coming up in east which will likely

create a fight for market share there.

Please find links to our earlier

reports:

East: Prices improve but sustainability questionable



After increasing by ~INR40/bag in January and early February, prices in east are

down by INR15/bag from mid-February (although still up by INR25/bag or 8% in

YTDCY20). Further correction of INR15-20/bag is expected in March.

While demand growth was strong in December at ~10% YoY, it slowed down to

6% YoY in January and has been nearly nil in February so far. Demand is largely

coming from affordable housing and government-led infrastructure projects.

While incumbents (UltraTech, Dalmia, Nuvoco, ACC) continue to dominate the

West Bengal market, the newer players (Ramco, Penna, etc.) have been

attempting to gain market share without much success. Ramco’s volumes in

West Bengal improved to only 123kt in January, as against 115kt in the same

month last year (i.e. up 7% YoY), even though capacity has doubled.

Prices are likely to be weak in the monsoon months (Jul-Sep 2020) as several

new capacities would start by then (Dalmia Bharat, Star Cement, etc.).

South: Attempted price hikes not successful due to weak demand



Industry in south has attempted a sharp price hike in February with prices in

Kerala being raised by ~INR50/bag (15%). However, this follows a correction of

INR35/bag (~10%) in January.

The near-term pricing outlook is weak due to dismal demand (down by 10-15%

YoY in Kerala). February hikes have already started getting rolled back by INR10-

15/bag.

While UltraTech has been focused on improving prices in the state, it has not

found enough support from other brands which have been focusing more on

volumes, causing prices to correct.

Amit Murarka - Research analyst

(Amit.Murarka@motilaloswal.com) +91 22 7199 2309

Pradnya Ganar

2020

25 February

- Research analyst

(Pradnya.Ganar@motilaloswal.com); +91 22 6129 1537

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Sector Update

Central: Stable demand outlook, but prices to weaken post Holi



Prices in central India increased by ~INR15/bag (4%) YTDCY20, led by a hike of

INR10/bag in January. Non-trade prices increased by a higher INR25/bag.

Demand has been flattish as urban housing remains weak, while government

demand growth is being challenged by constraints on state budgets.

Prices are expected to correct by INR15-20/bag post Holi (9

March) as

companies focus on achieving year-end volume targets.

Valuation and View



We expect cement sector utilization to improve structurally over the next three

years given limited capacity addition at ~4% CAGR. As against that, we expect

demand CAGR to sustain at 6% – in line with past five years.

We believe that the north and central India markets are best placed structurally

as they have achieved a high level of consolidation with utilization at ~85%

already. Prices in these regions should continue to fare better.

We prefer companies that (a) have an ability to gain market share, (b) are

moving down the cost curve and (c) provide valuation comfort. Therefore,

UltraTech is our top large-cap and JK Cement our top mid-cap pick. We also like

ACC as a value pick. We do not see much upside in Shree and Ramco, as their

potential market share gains over the next three years are already priced in.

Cement: Valuation summary

Mcap

ROE (%)

P/E (x)

CMP (INR) RECO

(USD b)

FY20E FY21E FY22E FY20E FY21E

UltraTech

17.4

4,344 Buy

11.5 13.6 14.8 30.8

23.4

Shree Cement

11.8

23,553 Neutral 14.1 15.0 16.3 52.5

39.8

Ambuja Cement

5.8

212 Neutral

6.6

6.8 20.2

19.2

ACC

3.7

1,401 Buy

12.3 11.7 11.7 19.4

18.5

The Ramco Cement

2.6

791 Neutral 13.0 12.6 13.6 30.4

28.2

Dalmia Bharat

2.2

816 Buy

2.8

4.7

7.6 52.8

30.5

JK Cement

1.6

1,441 Buy

16.6 16.5 19.0 23.2

20.1

Birla Corp

0.8

718 Buy

10.4 10.8 11.6 11.4

10.0

JK Lakshmi

0.5

322 Buy

15.9 15.4 16.8 14.7

13.1

Prism Johnson

0.5

66 Buy

6.8

8.4 10.3 41.8

32.3

India Cement

0.4

87 Neutral

2.5

2.8

3.8 20.6

18.1

FY22E

18.9

32.1

17.8

16.9

23.2

17.9

14.9

8.5

10.3

24.5

12.8

EV/EBITDA (x)

EV/Ton(x)

FY20E FY21E FY22E FY20E FY21E FY22E

13.9 11.7 10.1 168 162

153

20.7 17.6 14.5 257 233

219

10.8

9.7

8.9 110 103

100

8.9

7.5

6.3

17.3 15.3 12.8 140 139

138

8.2

6.7

5.5

11.0

9.0

7.0 112 107

5.2

4.4

3.9

7.0

6.2

5.0

8.5

7.6

6.9

7.6

7.4

6.6

25 February 2020

Sector Update

Story in charts

Exhibit 1: All-India prices up 6% YoY in Feb’20

All India retail price INR/ 50 kg bag

390

330

270

210

150

% Change YoY (RHS)

24%

12%

-12%

-24%

450

390

330

270

210

150

Exhibit 2: Prices in north up 16% YoY in Feb’20

North retail price INR/ 50 kg bag

% Change YoY (RHS)

30%

15%

-15%

-30%

Exhibit 3: Prices in central India up 13% YoY in Feb’20

Central retail price INR/ 50 kg bag

390

330

270

210

150

% Change YoY (RHS)

34%

17%

-17%

-34%

Exhibit 4: Prices in west up 1% YoY in Feb’20

West retail price INR/ 50 kg bag

390

330

270

210

150

% Change YoY (RHS)

50%

25%

-25%

-50%

Source: MOFSL

Exhibit 5: Prices in south down 5% YoY in Feb’20

South retail price INR/ 50 kg bag

450

390

330

270

210

150

% Change YoY (RHS)

81%

54%

27%

-27%

-54%

Exhibit 6: Prices in east up 7% YoY in Feb’20

East retail price INR/ 50 kg bag

390

330

270

210

150

% Change YoY (RHS)

60%

40%

20%

-20%

Source: MOFSL

25 February 2020

Sector Update

NOTES

25 February 2020

Sector Update

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25 February 2020

Sector Update

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25 February 2020