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Published on 14/05/2018 4:51:43 PM | Source: Reliance Securities Ltd

Cement Sector Review by Reliance Securities Ltd

Below is the View On Cement Sector Review : Growing Pessimism Unlikely to Hold for Long by Binod Kumar Modi Sr. Research Analyst Reliance Securities.

Rsec View: The rule of wise investmen  t says that stocks must not be ignored when there is general pessimism. The above natures of pessimisms are broadly short in nature and are unlikely to remain for long. However, considering visible revival in demand and utilisation pickup, we believe price recovery is round the corner. We envisage incremental demand is likely to be higher than incremental supply in ensuing years unlike last cycle. Hence, we maintain our positive view on the stock for long term perspective.  

UltraTech Cement and Shree Cement are out top picks in large cap, while we like J.K. Cement, Sagar Cement, HeidelbergCement India in the mid cap.  

Cement: Growing Pessimism Unlikely to Hold for Long

   Cement stocks have witnessed sharp correction over last couple of trading sessions despite reporting satisfactory performance by major cement companies. While revival in rural demand and incremental consumption from infra projects led to higher sales volume by cement companies, concerns pertaining to soaring fuel prices and ambiguity over pricing outlook are the major worries for investors. We highlight the following headwinds for cement sector, which led to sharp profit booking in several counter of cement stocks:-  

1.Soaring Fuel Prices: Petcoke prices continue to move northwards as having seen ~5% sequential jump in 4QFY18, prices further increased by ~4.5% in Apr’18 to Rs8,530/tonne (MRPL Price- excl 18% GST). We understand 5% increase in petcoke prices can bloat operational cost by Rs40-45/tonne.  

2.Blanket Ban on Import of Petcoke: The Supreme Court’s ultimatum to government to impose a complete import ban of petcoke has not gone down well to investors. We reckon that with the sharp rise in petcoke prices and recent imposition of 10% custom duty on imported petcoke already made imported petcoke usage unviable for most of cement plants. Many companies have already resorted to move to coal. Hence, we do not expect any major impact from this move. Further, most of companies have already lowered their share of imported petcoke in recent quarters.  

3.Ambiguity on Price Recovery: Given most of cement companies are operating to the best of their operating efficiencies, price increase in the sole factor to support margin expansion amid bulging cost scenario. Avg. realisation in FY18 was broadly flat and hence margin contraction was visible. While we expect prices to recover in FY19E (Apr’18 recovered by ~3-4% MoM), industry is concerned about the sustainability of price considering new capacity to be added by Shree Cement in South/Western, production ramp from sick units of Binani Cements/Murli Industries, prolonged sand crisis in Rajasthan, etc.  

4.Spiralling Freight Cost: While recent spike in freight cost/tonne of companies was mainly caused by shift from ex-factory to FOB price system, higher diesel price and loading restrictions in various states were also driving factors. Considering most companies are complying loading restrictions, an average sequential increase of ~Rs2.8/litre till date can bloat freight cost by ~5% in roadways.  

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