Cement demand trajectory to improve; dealers in the eastern region more optimistic :: Nomura research

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Our interactions with cement stockists/dealers across India suggest demand was weak in 1Q (as per DIPP numbers: Jan production growth was muted ~1.0% y-y). The key reason for the weak demand was lower offtake of cement from government related projects. We believe this weakness can be attributed to lower spending by the government as it tried to meet its fiscal deficit target for FY15. While volume trends were weak in 1Q, stockists/dealers sounded relatively more optimistic on volume growth in upcoming months, particularly in the eastern region. We expect cement demand growth to recover on higher government spending on infrastructure projects (higher allocations for roads and railways in the Union Budget FY16) and we estimate cement volume growth of ~7.8% for FY16F. We remain selective in the sector given the wide disparity in utilisation levels across different regions along with demand drivers being more favourable for some regions. In the large cap space, our preferred picks are UltraTech Cement (UTCEM IN) and Shree Cement (SRCM IN). In our Neutral calls, we prefer Ambuja (ACEM IN) over ACC (ACC IN). Weak demand trends in 1Q; lower offtake from government projects Our channel checks suggest demand trends over Jan-Mar quarter across regions was weak. In fact a few dealers said they had sold lower volumes in Jan-Mar period (seasonally strong quarter) vs the Sep-Dec period. The key reason for the weak demand was lower offtake of cement for government projects. The dealers cited delays in payment by the government to contractors slowed down execution of projects. In a few states such as Telangana, Jharkhand, Bihar, Karnataka the impact was also due to local issues i.e. high prices and lower availability of sand / aggregates. Demand trajectory to improve; dealers in eastern regions more positive While volumes trends were weak in 1Q however stockists/dealers sounded more optimistic for upcoming months. They believe execution of government projects should start gain traction from May onwards as contractors’ dues are cleared and newly announced projects are executed. However, dealers sounded cautious on the pick-up in cement demand from organised real estate segment (developers) as they believe sentiment in the property market remains weak. Region-wise, dealers in the eastern region were optimistic on cement demand growth improving as they expect government spending to increase. In contrast, sentiment of southern dealers remains subdued. All-India average cement prices up ~INR 10/bag on q-q basis; southern prices remained firm during 1QCY15 up INR 35/bag q-q Price hikes in January were pulled back in late Feb and early March on the back of tepid demand across regions except in the south. The prices in the south remained firm during 1Q due to ongoing production discipline and was up INR 35/bag on q-q basis. In the north, cement prices corrected the most during Feb and recovered from mid-March as a result prices will be flat q-q in 1QCY15. Lower prices in the north weighed on the central market as a result of which cement prices in the central region were down by about ~INR 3/bag on q-q basis. In other regions namely the east and west regions, cement prices were up INR 8 to 10/bag on sequential basis.