Southern cement players in a sweet spot on higher prices across regions

Recent channel checks by brokerages showed an improvement in cement prices across India, for February. The same was being led by South India, where a 16.9 per cent month-on-month (MoM) rise in the price of a 50 kg bag has resulted in a 5.8 per cent improvement in the average all-India cement price MoM, indicates JM Financial’s data.

This is good news for South Indian cement firms, which have seen a spell of weak prices and rising expenses impact their earnings growth. For instance, rising costs and lower realisations pulled down India Cements’ per tonne profitability by 26 per cent year-on-year to Rs 456 during the December quarter (Q3), while Ramco Cements’ profitability, at Rs 765, was at the lowest in 16 quarters, said analysts.

As a result, Ramco Cements, India Cements and Orient Cements have seen their share prices decline 24-56 per cent from their highs in February-April 2018.

Prices in the south are now at their highest levels among all regions, despite having the lowest regional capacity utilisation. At the same time, spreads (difference between prices and energy costs) for Q4FY19 increased 5 per cent sequentially on account of higher prices and lower fuel costs, said analysts at Kotak Institutional Equities.

Moreover, rising cement prices are being supported by the softening of raw material costs, which bodes well for firms’ profitability. The costs of pet coke, coal, and even diesel started declining from Q3, and gains due to the same should start reflecting from the March quarter.

While the benefits will be more prominent for players in the south in light of the sharper rise in realisations, cement firms across regions are expected to report an improvement in profitability.

Analysts at Elara Capital said companies based in South India, such as Orient Cement and India Cements, are likely to outperform in the near term, while firms with presence in central, Northeast India and North India are likely to outperform in the long run given the better demand-supply situation. Among others, pan-India players ACC and UltraTech Cement are well placed to draw benefits.

Meanwhile, India ratings has pegged cement demand growth at 6-8 per cent over FY20, and says resilient demand, moderate capacity additions, and tapering costs will support margins of cement manufacturers.

Some analysts also said increased supplies from acquisitions seen in the past two years will moderate, as these capacities have already seen a good ramp-up.

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