Cement prices remaining firm on a year-on-year (y-o-y) basis in the seasonally soft September quarter (Q2) should accrue benefit for pan-India manufacturers and players focussed on Northern, Eastern and Western regions. Notably, analysts expect prices to hold ground going ahead as well, led by higher demand, thereby benefitting cement markers.
Usually, as Q2 witnesses monsoon, prices tend to remain soft. Thus, the increase in all-India cement prices by 1-2.5 per cent y-o-y is surprising. Though demand from the housing segment remains subdued in the monsoon season, government projects are lending support, say analysts.
Moving forward, expectations remain firm on demand revival led by recovery in rural India consequent to a good monsoon. Government initiatives on affordable housing and infrastructure development such as metro projects, highways and coastal roads, new railway projects and even high-speed rail projects, all bode well for demand. Analysts at Sharekhan say after the monsoon season, the demand environment is expected to improve, while cement prices are likely to remain firm with improving capacity utilisation across regions. Higher capacity use, in turn, should mean better profit margins.
The gains should also reflect in the Q2 results for pan-India players, though it may be different for regional players. UltraTech and ACC are among the obvious choices of analysts. Ambuja Cements and Shree Cement, with exposure to multiple regions and proven track record, should also gain. But, some of these gains may be offset by higher fuel prices.
For investors, the share price of both UltraTech and Shree Cement has corrected by 11-14 per cent since their May highs on the back of the goods and services tax (GST)-related destocking by traders and thereafter monsoon, which gives a good entry opportunity. ACC, with expanded capacities in east India, and Ambuja, with large west India exposure where demand remains strong, hit new highs this month in the backdrop of the ongoing merger process. Nevertheless, the seven-nine per cent correction thereafter offers an opportunity.
Among regions, prices in Central India are down 4.4 per cent, while prices are flat in North, on year-on-year basis. In South where prices are down three per cent the lower sand availability (in Tamil Nadu) still remains a concern, while Hyderabad has seen sharp recovery in prices - from lows of Rs 240 a bag in August-end to Rs 310 now. Hence, the ability of South-based manufacturers to sell their produce in other regions (nearby states) will decide the extent of impact of lower realisations. West continues seeing good realisation as prices are up 11 per cent year-on-year, while strong demand has pulled up prices in the East by 4-5 per cent over August. Thus, regional players as JK Lakshmi Cement (besides ACC) may also benefit from expanded capacities in East India region.