Cement Sector Update - Dealer Interaction - Centrum

Dealer interaction – Key takeaways

Cement 

Price hike likely but current environment remains weak

We interacted with cement dealers across India (27 cities) to get a sense on the demand and pricing scenario for the sector. Though demand continues to remain weak across India, cement manufacturers are expected to hike prices by Rs10-20/bag in most places in the current month.

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Cement demand in North and Central India continues to remain sluggish due to ongoing sand mining issues and shortage of bricks, which resulted in exorbitant prices for these materials. Apart from that severe cold in these regions has also impacted cement demand. Due to the ban on sand mining and shortage of bricks in the North region, large-scale construction activities have virtually come to a standstill. Price of a full tractor load (about 150 cubic feet) of sand which was available for Rs 1,200 before the ban has risen to about Rs 2,500. A decision to lift the mining ban was expected on January 9, but was postponed till January 20, 2013. Shortage of bricks was caused by the ban imposed by Supreme Court on brick manufacturing kilns not having environmental clearance. This resulted in ~40% increase in brick price to Rs5/piece. Dealers expect cement demand to improve once the mining ban is lifted.

In South region, weak demand scenario and excess supply continues to impact cement manufacturers. Price in Hyderabad has slipped back to the range of Rs215-220/bag again. Dealers in Hyderabad are expecting a steep price hike (~Rs50/bag) after Makar Sakranti (or Pongal) festival. In other cities in the South region, price is hovering in the range of Rs300-325/bag. In the West region, though there was a price correction of Rs10-15/bag last month, prices are stable now.

In Maharashtra, sand mining ban continues to affect cement demand, and demand in Gujarat has also softened in recent times. In East region too, dealers indicate a sluggish demand scenario; however, a price hike of Rs10/bag has been taken in Bhubaneswar recently and in Patna, Rs10/bag hike is expected in the next 2 days. In Raipur, a price hike of Rs10/bag is expected from January 12, whereas, dealers are expecting price hike of Rs20/bag in Kolkata from January 20. Our interaction suggests that demand scenario continues to remain weak across India. Though, in most places dealers are expecting price hikes in the next 1-2 weeks, in some places they remain skeptical regarding sustainability of price hikes due to sluggish demand.

Outlook & Valuation: Though in the near-term we expect cement stocks to remain under pressure due to sluggish demand and pressure on cement price, in the long run we remain positive on the cement industry as we believe that demand-supply scenario will improve going forward. We believe that effective utilization rate of the industry will gradually improve to 80.4% by FY15E against 76.9% in FY12, which will result in improved pricing power for manufacturers.  Our preferred pick among large players are UltraTech and Shree Cement, followed by Ambuja and Grasim Industries. In mid-caps our preferred pick continues to be JK Cement followed by Mangalam Cement. We also like Orient Paper & Industries and expect an upside in the stock in the near-term due to the de-merger of the cement business into a separate entity.

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