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Our interactions with various market participants in North India reveals that 1QFY20 cement demand has been ~10% YoY lower and is expected to remain under pressure till monsoons end.
Prices getting rolled back
* After peaking in Mar’19, cement demand has weakened due to labor shortage, which was impacted on account of the general elections. 1QFY20 cement demand has been ~10% YoY lower and is expected to remain under pressure till monsoons end. Further, sand mining issues are still prevalent in markets of North India.
* While the strong demand in March encouraged players in the northern regions to increase prices in April and May, the month of June saw prices getting rolled back due to the demand slowdown.
* The northern region is fairly consolidated with the top-5 players accounting for ~70% of the market share. No major capacity expansion is expected to come on stream for the next two years, barring Wonder Cement (adding 2.5mt by Jul’19) and JKCE (adding 2mt by Sep’19).
* We prefer JKCE as we believe the company should witness an improvement in profitability due to the commissioning of new capacities. We value the white cement segment at 10x June’21 EV/EBITDA and the grey cement segment at 8x June’21 EV/EBITDA to arrive at a target price of INR1,237/share for JKCE . Buy.
Demand weakens after peaking in Mar’19; non-trade continues to dominate
* Mar’19 witnessed robust demand growth in the northern regions; average demand for the month stood at 8.6mt, exceeding the average supply of 8mt/month in the market.
* However, demand started to weaken as elections approached on labor shortages. Sand mining issues are still prevalent in the markets of Rajasthan. Also, the extreme heat situation in May resulted in construction activities coming to halt, thus affecting demand. 1QFY20 demand is expected to have declined by 10% YoY.
* Demand continues to be driven by the infra segment with non-trade constituting 40% of the sales mix for the region.
* We expect demand to remain soft till the end of monsoons. Players expect the region to record a growth of 3% for FY20, as the third and fourth quarters of FY20 would also have a high base from FY19.
Prices rolled back due to weakening demand
* After witnessing healthy demand growth in March, players hiked prices by INR50/bag in April and May, anticipating the trend to continue.
* However, with slowdown in demand, prices were rolled back in June to the extent to INR10-12/bag.
* With demand expected to remain soft till end of monsoons, pricing is also expected to remain subdued.
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