Cement Makers Expect Return Of Pricing Power, Stocks Rally
Cement stocks jumped in January, snapping two months of declines, after price hikes across India.
Cement stocks jumped in January, snapping two months of declines, after price hikes across India on expectations of a recovery in construction activity.
Shares of cement makers have rallied between 5 percent and 24 percent in January so far—Orient Cement Ltd. gained the most and ACC Ltd. the least.
The companies cut prices or rolled back hikes due to tepid demand in the last seven months amid excess supply as demand remained muted due to unseasonal rains, floods in few states, a post-election lull in government projects and unavailability of sand. Year-end pressure to meet sales target dragged down the prices. Brokerages think cement makers have turned the corner.
A report by SPARK Capital had suggested a price hike of Rs 20 per bag at the start of the year by cement producers in east, south and west India and Rs 10 per bag in the northern and central region. And it expects another round of price hike in second half of January.
Deepak Khetrapal, managing director at Orient Cement, said the stock recovery isn’t just on the back of pricing power but on improved volumes as well. “Demand strength is being witnessed across the markets and much of this demand is coming from dealers, indicating a pick-up in independent house construction and repair segment.”
Production Up
On a monthly basis, cement production showed an uptick in the three months through November, according to the core industries data released by Central Statistics Office. But it fell 3 percent year-on-year during October and November.
Analysts, however, remain optimistic. Morgan Stanley’s channel checks indicate that volume growth was slightly better in December. Improved sand availability in Andhra Pradesh and Telangana and partial lifting of a construction ban in Delhi-NCR has been positive for volumes, it said.
Cement demand grew 2 percent in the third quarter of the ongoing fiscal compared to a 1-2 percent decline during the first half, Macquarie Research said in a report. The brokerage expects demand to grow 3-4 percent in the fourth quarter and 6 percent over next fiscal.
Demand is also expected to improve over the next five years on the back of the government’s $1.5-trillion plan to build infrastructure. The programme will include existing projects in the energy, road and railway sectors in the pipeline.
Jefferies expects demand to be driven by government-led affordable housing schemes in the near term before infrastructure takes over. N Srinivasan, India Cement Ltd.’s managing director, agreed that 2020 would to be better year for the cement industry on the back of improved demand from the housing segment.
Macquarie also said cost pressures should ease given a decline in shipping freight rates for dry bulk commodities and stable e-auction prices at Coal India over the past few quarters.
Input Cost Tailwind
Energy costs—which contribute around 25-30 percent of total cost of the industry—have come down due to falling prices of pet coke and coal—key raw materials in cement making.
According to a Nomura report, domestic pet coke prices fell 8 percent sequentially in the quarter ended December after declining 13 and 11 percent in the first and second quarters, respectively. Meanwhile, international coal prices too have declined 38 percent year-on-year to $135 per tonne in December, Bloomberg data show.
All that may contribute to another price hike of Rs 20-30 per bag of cement soon, according to a note from Reliance Securities.
PR Venketrama Raja, MD of Ramco Cements Ltd., one of the largest cement makers in south India, prefers to wait and watch. It remains to be seen how demand shapes up for the region as a whole especially after Pongal or Makar Sankranti, which marks the start of construction activity, he said.
Jefferies, however, is optimistic and expects the next upcycle of cement sector to last longer than the previous one.
WATCH | India Cement’s N Srinivasan on his outlook for 2020.