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With railway freight increasing ~20% w.e.f. March 6, 2012, cement prices across regions are set to increase by INR 8-10/bag. Prices are expected to rise by another INR 5-10/bag if the 2% expected excise duty hike in the forthcoming budget goes through. While the proposed cement price hike can be margin accretive in the busy season—Q4FY12 and Q1FY13— (we estimate the impact to be INR2-4/bag while a INR10/bag increase in cement prices transforms to a net realisation increase of ~INR7/bag, net of current excise and VAT), it will hurt the industry in the lean season—Q2 and Q3FY13—as we perceive these price hikes unsustainable due to continued low industry utilisation of 78% for FY13E versus 77% in FY12E.
Railway freight up ~20%; price hike to be margin accretive
Indian Railways has introduced new freight rates w.e.f. March 6, 2012. The revised tariff is ~20% higher than the earlier rate. Of the stocks under our coverage, ACC and UltraTech have the highest exposure of 46% and 35%, respectively, to railways for domestic despatches and hence their cost is likely to surge by INR80-60/tonne respectively. Companies are looking to increase prices by ~INR10/bag, which will lead to realisation rising ~INR7/bag net of excise and VAT. As a result, the hike is estimated to be margin accretive in the short term.
February despatches expected to be up ~8-9%
Taking a cue from despatches of major players (who collectively reported an increase of 11.9% YoY), we estimate the February industry depsatches to be up ~8-9% YoY. As a result, we estimate the YTD demand growth to inch up to 6.4% YoY.
· Region-wise summary
We surveyed 29 cities across India to get a region-wise demand and price trend in both trade and non-trade categories. Key highlights are as follows:
North: Current prices under pressure, but expected to rise
Current cement prices are under pressure in the North on back of low demand and continued supply. Prices have declined by ~INR3-15/bag compared to prices on February 13. However, on back of increase in rail freight, prices are likely to increase by ~INR10/bag.
East: Low arrivals help price rise
Prices in the region have increased ~INR3-20/bag on account of low arrivals. Prices are likely to increase by INR10-15/bag in an attempt to pass on hike in rail freight.
South: Firmness maintained
With demand improving marginally, prices have increased by ~INR5-10/bag in Bengaluru and Chennai. They have remained flat in Cochin and Hyderabad. We expect a price hike of INR8-10/bag in the coming week to pass on the hike in rail freight.
West: Surge continues
Cement prices have increased further by ~INR5-20/bag. Led by supply shortage, Nagpur registered a price hike of ~INR9-15/bag in the trade segment and of ~INR20-30/bag in the non-trade segment. Price hike of INR10/bag has been announced in the region on account of increase in rail freight.
Central India: Price set to increase
Prices have seen a hike of INR 3-20/bag across the region except the city of Ghaziabad (Uttar Pradesh), which registered the price decline of INR5/bag. Prices are expected to increase by ~INR 10/bag due to increase in the rail freight.
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