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Published on 7/12/2018 9:29:21 AM | Source: Yes Securities Ltd

Indian Cement Industry by Yes Securities


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Regional dynamics at play: Two Stars Emerge!

The Indian cement industry has been facing turbulent times since the past few years. A multitude of headwinds have palpably dented the financial performance of many cement players, and the overcapacity scenario (utilization levels at abysmal lows) has been aggravated by a sharp rise in input costs and the lack of pricing power.

To make matters worse, the housing sector is undergoing tremendous stress given the teething woes of RERA and GST coupled with the crippling impact of the demonetization roll out. With poor consumer sentiment and shift of investment funds in favour of other asset classes, the housing sector has suffered a steep decline in new launches, in turn hampering the overall cement demand.

Conversely, the beleaguered sector has also relished some tailwinds, emanating from the Government of India (GoI)’s thrust on infrastructure segment and affordable housing projects. Accordingly, investments in cement intensive infrastructure segments have grown by ~13% annually over FY15-FY19BE, while the construction of affordable houses since the launch of Pradhan Mantri Awas Yojana (Gramin and Urban) has been quite impressive: ~7.86 mn units in rural areas and ~0.97 mn units in urban areas (total sanctioning at ~6.04 mn units). We believe the infrastructure segment should continue to be the key demand driver, coupled with the prospective revival in rural housing. We reckon that a normal monsoon and MSP hike for agricultural produce should boost rural purchasing power in this fiscal. Overall, we expect cement demand in India to grow by ~7.6% over FY18-FY21E from 297 MT to 370 MT. 

On the supply side, the industry has witnessed a phenomenon which is nowhere closer to what an ideal capital cycle should look like. Since the start of the down-cycle in 2011-12, average ROCEs have declined from ~21% to ~11% currently (weighted average of top four companies). However, during the same time, the industry witnessed a fresh capacity addition of ~161 MTPA and consolidation (M&A deals involving ~72 MTPA of capacity) led by the major players. We expect the Indian cement industry to witness fresh capacities to the tune of ~64 MTPA over FY18-FY21E, thereby increasing the total capacity from ~471 MTPA (our estimates) to ~535 MTPA. We project capacity utilization levels to rise from ~63.1% in FY18 to ~69.1% by FY21E. 

Notwithstanding our cautiously optimistic view on the overall cement industry, we hold a positive bias for regions like Central, East and few pockets of South (Andhra Pradesh & Telangana). By virtue of our region-specific assessment of underlying trends pertinent to infrastructure investments, PMAY progress, growth potential and evolving supplydemand situation, we infer that Central, East and South markets (primarily led by AP & Telangana) would outperform over FY18-FY21E with a growth expectation of 7.8%/9.5%/8.4% respectively during the said span. Consequently, we believe that Ultratech Cement Ltd (UTCEM), Dalmia Bharat Ltd (DBEL), ACC Ltd (ACC), Shree Cement Ltd (SRCM), Birla Corporation Ltd (BCORP), Heidelberg Cement India Ltd (HEIM) and Sagar Cements Ltd (SGC) should be the key beneficiaries owing to their higher exposure to these regions.

The cement industry is gearing up for the next up-cycle in demand, as reflected by the massive capacity addition in the pipeline. We prefer to stick to large cap names due to their pricing power, balance sheet strength and ability to tide through overcapacity scenarios and delayed revival in housing activity. Accordingly, we initiate coverage on UTCEM, ACC and DBEL. Further, in the small cap space, we continue to like SGC (on which we have already assumed coverage). 


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