Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Trade Prices Hold the Fort; Non-trade Prices Slide More

ff While all-India average cement prices in the trade segment remained broadly resilient in Exhibit 1: A Snapshot of Region-wise average cement prices (Rs/bag)
Sept’19, demand momentum continued to remain dismal as extended monsoon and persistent Rs/bag Sept'2019 Sept'2018 % change yoy Aug'2019 % change mom
slowdown in governments spending impacted the demand. However, as per the dealers, Sept’19 North 305 280 8.9 310 (1.6)
witnessed a steeper price cut in non-trade segment, as dry-up demand in the trade segment South 328 322 1.9 313 4.8
led the companies to push more volume in non-trade segment. Most dealers opined that sales West 300 294 2.0 304 (1.3)
East 286 291 (1.7) 294 (2.7)
volume was badly impacted in Sept’19 and is meaningfully lower compared to Sept’18, as lack of
Central 326 310 5.2 328 (0.6)
demand from government-sponsored infrastructure and housing projects has been the key factor All India Avg. 309 299 3.2 310 (0.3)
for demand slowdown. Notably, with the likely pick-up in trade demand from Oct’19, the dealers Source: RSec Research
expect competitive intensity in non-trade segment to recede and the pricing momentum to remain Exhibit 1: A Snapshot of Region-wise average cement prices (Rs/bag)
benign hereon. Rs/bag 2QFY20 2QFY19 % change yoy 1QFY20 % change qoq
ff Demand momentum in Northern, Central and Eastern markets continued to remain relatively
North 310 277 11.8 320 (3.2)
better than their Southern and Western counterparts. We note Central and Eastern markets are South 319 318 0.2 353 (9.6)
likely to witness faster demand recovery led by higher proportion of trade demand and higher West 305 296 3.2 330 (7.5)
allocation (~42%) of housing units under PMAY (R). East 293 297 (1.6) 313 (6.5)
Central 328 313 4.9 337 (2.6
ff All-India average cement price remained broadly flat on MoM basis at ~Rs305-310/bag (+3.2% All India Avg. 311 300 3.6 331 (5.9)
YoY and -0.3% MoM) mainly due to realisation recovery in the Southern region. While average Source: RSec Research
Southern prices improved by 1.9% YoY and 4.8% MoM mainly led by sharp price recovery in AP
Exhibit 2: A Summary of YTD Change in Prices
and Telangana despite soft demand, average prices in other regions contracted by ~1-3% MoM.
Rs/bag YTDFY20 FY19 % change qoq
However, the month witnessed a steeper price contraction in non-trade segment, as demand
from trade segment was impacted severely due to extended monsoon. Therefore, price gap North 315 279 13.0
South 336 319 5.4
between trade and non-trade segments widened further to ~Rs50-70/bag.
West 318 301 5.7
ff 2QFY20 Prices: Northern prices appear to have remained the most resilient with ~11.8% YoY East 303 298 1.8
growth and 3.2% QoQ decline at ~Rs305-310/bag followed by Central region (+4.9% YoY and Central 332 313 6.3
All India Avg. 321 302 6.3
-2.6% QoQ) and Western region (+3.2% YoY and -7.5% QoQ). However, average prices in Eastern
Source: RSec Research
(-1.6% YoY and -6.5% QoQ) and Southern (+0.2% YoY and -9.6% QoQ) remained subdued. Research Analyst: Binod Modi
However, impact of sequential price contraction is likely to be higher by 150-200bps due to steep  Contact: (022) 4303 4626
price contraction in the non-trade segment.  Email: binod.modi@relianceada.com

1 1
Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Northern Region: Prices Declined by 1.6% MoM Exhibit 3: Northern cement pricing over the years
ff Having witnessed muted and dismal demand scenario in Jul-Aug’19, demand momentum was 340

relatively better in Sept’19, as receding monsoon in several pockets along with volume push by the 320

companies led to flat-to-moderate growth in sales volume. Dealers expect demand momentum to 300
improve further post Diwali with the further pick-up in infrastructure projects. A continued uptrend
280
in the cement prices being witnessed since Feb’19 puts the Northern region in a sweet spot despite

(Rs)
260
moderate price decrease during the last three months. Average price in the region marginally
240
contracted by ~1.6% MoM to ~Rs300-305/bag.
220
ff Average price in Delhi/NCR witnessed the steepest decline to the tune of ~Rs10-15/bag MoM to
200
~Rs345-350/bag mainly due to volume push. As per the dealers, despite MoM improvement, sales

Apr-10

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16
Apr-11
Apr-08

Apr-09

Apr-17
Oct-10

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16
Nov-07

Mar-18

Sep-18

Mar-19

Sep-19
Oct-11
Oct-08

Oct-09

Sep-17
volume remained dismal on YoY comparison. They do not expect any price contraction hereon and
expect the demand momentum to pick-up further post festive season. Price (Rs/bag)

ff Demand momentum Jaipur, Rajasthan improved moderately on MoM basis, as clear weather Source: RSec Research

resulted in pick-up in construction activities. However, decreasing marginally by Rs5/bag MoM,

the cement prices currently hover at ~Rs320-325/bag. Further, the Rajasthan government is in the Exhibit 4: Northern cement price as on end of Sept’19
process of defining a framework policy on M-Sand in order to tackle sand crisis in the state, which 320
bodes well from the long-term perspective. In addition to this, recently the Rajasthan High Court
300
has asked the principal secretary, in-charge of the mines to frame a uniform policy illegal sand
transportation in consultant with police and transport department. 280

ff Domestic cement companies in Amritsar continued to get benefitted in Sept’19, as the flow of (Rs) 260

Pakistani cement is at all-time low now. Again decent sales volume resulted in resilient pricing,
240
which is ruling at ~Rs340-350/bag with non-trade price lower by Rs40/bag. Dealers further cited
that the prices are likely to remain flat in the current month and is likely to increase only after 220

festivals. 200
Sept'2018 Aug'2019 Sept'2019
ff Average price in Chandigarh too remained flat on MoM basis at ~Rs350-355/bag. As per
Price/bag
the dealers, demand momentum improved on MoM basis due to lower rainfall and pick-up in
Source: RSec Research
construction activities.

2 2
Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Southern Region: Prices Recovered by ~4.8% MoM but Tepid in 2QFY20 Exhibit 5: Southern cement pricing over the years
380
ff Having witnessed continued pricing pressure to the tune of ~Rs40-45/bag over Jun-Aug’19,
360
average realisation in Southern region witnessed strong recovery of ~4.8% MoM in Sept’19
340
mainly due to strong price recovery in AP and Telangana markets. However, slowdown in 320

government spending in AP and Telangana and cancellation of several projects and payment 300
280
related issues resulted in steep price cut during Jun-Aug’19. Average realisation in the region

(Rs)
260
currently hovers in the range of ~Rs325- 330/bag (+1.9% YoY and +4.8% MoM).
240
220
ff Demand environment in AP/Telangana markets remained sluggish in Sept’19 despite moderate
200
improvement in MoM sales volume led by lack of traction in government projects and sand 180
issues. However, with new sand mining policy unveiled by the AP government in the beginning

Mar-10

Sep-10

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

Sep-14

Mar-15

Sep-15

Mar-16

Sep-16

Mar-18

Sep-18

Mar-19

Sep-19
Mar-11

Sep-11
Mar-08

Sep-08

Mar-09

Sep-09

Mar-17

Sep-17
Oct-07
of month is likely to ease concern of sand availability. According to the new policy, sand will
Price (Rs/bag)
be available at Rs370/tonne at government-owned stockyards operated by Andhra Pradesh
Mineral Development Corporation (APMDC). Average price in Hyderabad recovered by Rs45- Source: RSec Research
50/bag to ~Rs335-340/bag (premium brands). Dealers are hopeful that with the pick-up in
Rs800bn Kaleshwaram irrigation project, demand momentum will improve in the coming
Exhibit 6: Southern cement price as on end of Sept’19
weeks.
350
ff In Chennai, average price remained flat on MoM basis at ~Rs360-365/bag, while softening 330
rains led to better sales volume on MoM comparison. Dealers expect demand momentum to 310
290
pick-up further in the coming weeks.
270
ff Prices in Bangalore continued to remain flat on MoM basis at ~Rs380-385/bag, while the (Rs) 250

demand scenario witnessed moderate improvement, as flood like situation in Aug’19 had 230
210
impacted the demand badly.
190
ff After correction of ~Rs25-30/bag during Jul-Aug’19, average price in Ernakulam (Kerala) 170
150
recovered by ~Rs8-10/bag MoM to ~Rs350-355/bag due to base affect. However, dealers cited Sept'2018 Aug'2019 Sept'2019
that the average price is likely to remain flat in the coming months. Further, average price in
Price/bag
Coimbatore for UltraTech PPC is hovering in the range of Rs405-410/bag (flat MoM).
Source: RSec Research

3 3
Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Western Region: Prices Dip by ~1.3% MoM

Exhibit 7: Western cement pricing over the years
ff Demand environment in Western region was impacted further in Sept’19, as election code of
360
conduct in Maharashtra, festival and extended monsoon resulted in lower volume even on MoM
340
basis. Most dealers cited that their volume declined by 10-15% YoY and 5-10% MoM. Payment
320
delay in projects segment sales also affected volume much. Notably, repair segment demand
300
in the trade segment was the main supporting element during the month. Notably, average
280
price in the region declined by ~1.3% MoM (~Rs3-4/bag) and currently rules in the range of

(Rs)
260
~Rs295-300/bag. Dealers expect likely pick-up in real estate sector post Shraaddh and pick-
240
up in governments’ spending post assembly election in Maharashtra to support demand in
220
the ensuing period. However, the price correction witnessed mainly in Maharashtra, while the
200
average prices in Gujarat markets remained broadly flat on MoM basis.
180
ff Average price in Mumbai (including Navi Mumbai and Thane belt) declined by a sharp ~Rs10-15/

Mar-10

Sep-10

Mar-12

Sep-12

Mar-13

Sep-13

Mar-14

Sep-14

Mar-15

Sep-15

Mar-16

Sep-16

Mar-18

Sep-18

Mar-19

Sep-19
Mar-11

Sep-11
Mar-08

Sep-08

Mar-09

Sep-09

Mar-17

Sep-17
Oct-07
bag in Sept’19, as further slackness in demand compelled the companies to decrease prices.
Price (Rs/bag)
As per the dealers, the current demand is coming mainly from repairs of dilapidated buildings
segment and a bounce back in demand is possible only after assembly elections. Average price Source: RSec Research
in Mumbai, Navi Mumbai and Thane is currently prevailing in the range of ~Rs310-315/bag.
Non-trade prices are hovering in the range of Rs250-260/bag. Dealers expect the prices to have
Exhibit 8: Western cement price as on end of Sept’19
bottomed out and any price cut hereon in unlikely.
320
ff Demand scenario in southern Maharashtra decelerated further in Sept’19 led by election code
of conduct. Thus, the price hike of ~Rs10/bag undertaken in the beginning of the month was 300
completely rolled back later. Dealers cited that their sales volume declined by 15-20% YoY and
280
MoM. Average wholesale price in these pockets decreased further by ~Rs8-10/bag MoM, which
currently rules at ~Rs285-290/bag. However, non-trade prices contracted by ~Rs15-20/bag to (Rs) 260
Rs235-240/bag.
240
ff Exceptionally, prices in Pune rose by ~Rs10-15/bag MoM despite sluggish demand environment.
Dealers stated that a heavy downpour in the city along with intensified sluggishness in real estate 220

markets due to weak economy hampered the demand. Dealers cited that the companies increased 200
the prices during the month, even as price reduction would not have induced the demand. Sept'2018 Aug'2019 Sept'2019

ff Average prices in Ahmedabad (Gujarat) continued to remain flat for the third consecutive month in Price/bag
Sept’19 with average price currently hovering in the range of ~Rs330-335/bag. As per the dealers,
Source: RSec Research
sales volume in Sept’19 was relatively better than the previous month owing to low base.
4 4
Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Eastern Region: Average Prices Softens by ~2.7% MoM Exhibit 9: Eastern cement pricing over the years
ff Demand momentum in the region, which was impacted adversely for last couple of months 360
led by slowdown in government spending and liquidity crunch in MSME segment, recovered in 340
Sept’19, as monsoon waned (for first two weeks) and volume push by the companies resulted 320
in higher volume barring Bihar. Going forward, revival in government’s spending and pick-up in 300
secondary demand are expected to result in better sales volume post festivals. Volume push in

(Rs)
280
the region resulted in ~2.7% MoM contraction in average price to ~Rs285-290/bag (-1.7% YoY). 260

ff Prices in Patna (Bihar) corrected by ~Rs8-10/bag MoM to ~Rs345-350/bag (ACC-Slag Cement) 240

and Rs325-330/bag (PPC). Dealers cited that demand is washed out due to heavy rains in last 220

ten days and halted government projects. However, they cited that acceleration in government 200

Apr-10

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16
Apr-11
Apr-08

Apr-09

Apr-17
Oct-10

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16
Nov-07

Mar-18

Sep-18

Mar-19

Sep-19
Oct-11
Oct-08

Oct-09

Sep-17
projects is the key to improve demand momentum hereon.

ff Prices in Kolkata too declined steeply by ~Rs15-20/bag on MoM basis to ~Rs305-310/bag due Price (Rs/bag)

to volume push by the companies before the start of Durga Pooja. Though West Bengal has Source: RSec Research
been quite strong over the years led by significant surge in affordable housing constructions
and higher trade demand due to low penetration in terms of pucca houses. We expect ramp-up
Exhibit 10: Eastern cement price as on end of Sept’19
in construction activities under PMAY (R) to drive cement consumption in the coming months. As
300
per the dealers, the prices are bottomed out, likely to bounce back post Durga Pooja.

ff Average price in Raipur (Chhattisgarh) remained flat on MoM basis in Sept’19 at ~Rs215-220/ 290
bag and non-trade at ~Rs195-200/bag owing to flat demand, which are the lowest among
all regions/pockets. As the demand scenario continued to remain bleak with no meaningful 280
(Rs)
up-tick in central and state government spending on infrastructure, the prices are expected to
270
remain range-bound in the coming months.

ff Liquidity crunch and lack of government projects have been impacting cement consumption 260

in Odisha for last couple of months. However, decreasing monsoon and volume push by
250
companies resulted in better MoM (+10-15%) sales volume. Notably, volume push by the Sept'2018 Aug'2019 Sept'2019
companies led average price in Bhubaneswar to decline by ~Rs3-5/bag MoM to ~Rs290-295/
Price/bag
bag in the trade segment. However, non-trade prices declined steeper by ~Rs10-15/bag to
Rs235-240/bag. The dealers expect the prices to increase after Navaratri. Source: RSec Research

5 5
Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Central Region: Prices Remained Steady Exhibit 11: Central cement pricing over the years
ff Demand in the region has primarily been depending upon strong demand from Uttar 360
Pradesh for last several months. However, demand in Uttar Pradesh, having got impacted 340

during July-Aug’19 due to incessant rain, recovered on MoM basis in Sept’19. Dealers expect 320

demand momentum to improve further after Diwali with the pick-up in construction activities 300

and increased sand availability. Continuing to remain steady, the average price in the region 280

(Rs)
260
declined marginally by 0.6% MoM to ~Rs325-330/bag (+5.2% YoY and -0.6% MoM).
240
ff Average price in Bhopal (MP) remained flat on MoM basis at ~Rs340-345/bag, while non- 220

trade price continued to hover at ~Rs275-280/bag with downward trend. Lack of government 200

Oct-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19
infrastructure projects in the state and sand availability issues have been affecting volume for
last several months. Dealers are hopeful about demand recovery from trade and rural segment,
Price (Rs/bag)
as monsoon was satisfactory in the current year as well.
Source: RSec Research
ff Demand buoyancy in Uttar Pradesh persisted for long with slackness for the last couple of
months. Notably, volume improved MoM basis in Sept’19 due to decreased rain intensity.
Exhibit 12: Central cement price as on end of Sept’19
However, average price in Lucknow (UP) remained flat on MoM basis at ~Rs375-380/bag (ACC
340
OPC), while PPC price now hovers at ~Rs365-370/bag in the trade segment. However, non-
trade prices are hovering in the range of ~Rs270-275/bag. 320

300
ff Average trade segment prices in Agra (Western UP) continued to remain flat at ~Rs325-330/
280
bag, while non-trade prices declined by ~Rs3-5/bag MoM to ~Rs275-280/bag. As per the (Rs)
dealer, sales volume broadly remained flat in Sept’19. 260

240

220

200
Sept'2018 Aug'2019 Sept'2019

Price/bag

Source: RSec Research

6 6
Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Exhibit 13: A synopsis of change in cement prices month-on-month (%)

Source: RSec Research

7 7
Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Outlook & Valuation

Having witnessed a strong demand momentum in the last two fiscals, demand growth remained muted during 1HFY20 owing to general election and slowdown in construction activities led by funding
constraints and absence of government spending. We expect demand momentum to pick-up after Diwali and to moderate with merely ~2% growth in FY20E mainly to be supported by pick-up in government
spending in the ensuing months. A sharp pricing recovery during Feb-May’19 is expected to aid cement companies’ performance in 2QFY20 with all-India average prices rising by ~3.5% YoY, which should
also be supported by moderation in fuel and input cost. We believe that resilient and steady price environment in Northern and Central regions will aid the regional cement companies to report steady
numbers in 2QFY20.

We further believe that demand growth to outpace supply growth over the next 3 years, which is expected to aid pricing sustainability. We maintain our positive stance on UltraTech Cement in the large-cap
space, and prefer JK Cement, HeidelbergCement India and JK Lakshmi Cement in the mid-cap space.

Exhibit 14: Valuations table

CMP* Recommendation Target Price M.Cap EV/tonne (US$) EV/EBITDA (x) RoE (%)
FY20E FY21E FY20E FY21E FY20E FY21E
ACC Ltd
1,608 BUY 1,720 302 117 119 12.3 11.1 12.7 12.1
Ambuja Cements
204 BUY 230 405 115 114 12.3 10.9 6.2 6.5
UltraTech Cement 4,341 BUY 4,900 1,192 194 188 14.9 13.0 12.2 11.3
Shree Cement 18,888 HOLD 19,000 658 224 208 20.0 18.2 12.7 13.0
Ramco Cements 752 HOLD 791 177 142 136 14.7 13.0 14.9 13.8
India Cements 79 HOLD 94 24 51 49 6.5 5.6 3.8 4.7
J.K. Cement 1,050 BUY 1,180 81 2 2 2.5 2.2 17.2 17.1
JK Lakshmi 303 BUY 430 36 52 45 7.0 5.9 12.5 14.7
Mangalam Cement 283 BUY 380 7.6 37 35 5.6 4.9 13.4 14.0
HeidelbergCement India 188 BUY 260 43 104 92 7.8 6.5 23.0 22.7
Sagar Cement 613 BUY 800 13 65 77 7.5 7.3 8.7 8.8
Source: Company, RSec Research ; Note: *CMP as on Sept 30 , 2019, ^December end companies, Ambuja’s valuations include its stake in ACC
#

8 8
Cement Sector Institutional Equity Research

Monthly Update | October 01, 2019

Digitally signed by NAVEEN KULKARNI

DN: c=IN, o=Personal,
Rating Guides
Rating Expected absolute returns (%) over 12 months NAVEEN 2.5.4.20=0c1ff234f79bd813e0368a6dc
03b4ca15b14b3b5a481882c186a1ef7
b6330566, postalCode=400072,

KULKARNI
BUY >10% st=MAHARASHTRA,
serialNumber=97c18031b020ff979ee6
HOLD -5% to 10% 07a3efa48cfba8b1455defbde1b85bee
cbfbf99bbde3, cn=NAVEEN KULKARNI
REDUCE >-5% Date: 2019.10.01 08:45:57 +05'30'

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9 9