OUTLOOK FOR CEMENT SECTOR IN INDIA

Cement demand recovered slightly during Q3FY14 mainly boosted by individual housing demand. Cement prices also started improving since Q2FY14 end and sustained till November 2013. However, prices witnessed a decline during December 2013 due to lower than expected recovery in demand as well as inventory clearance by large players.

Demand continues to be weak

Cement demand continued to remain sluggish in Q3FY14, with a weak October, followed by a relatively better November and again a subdued December. With demand failing to pick up post monsoon, volumes for major companies are estimated to drop 1-2% YoY. The all India average cement price inched up a mere 1.5% QoQ; and were down 0.5% YoY, making Q3FY14 the third consecutive quarter of YoY decline. Adverse impact continues in housing and infrastructure vertical, coupled with sand mining issues, delayed crop selling and politico-economic uncertainties. Capacity utilization is expected to remain low at ~70%, which is the lowest level in last decade. On YoY basis, HDFC Securities expect 1-2% volume decline for three large caps – UltraTech (UTCL), ACC & Ambuja (ACL).

Pricing Scenario in various regions during the quarter

Northern region:

Construction activity in the region was impacted by festive season as well as sand mining ban. Prices had improved during mont hs of Oct -Nov 2013 while witnessing a decline in Dec 2013. However, average cement prices for Q3FY14 were still higher than average of Q2FY14.

Southern region:

Prices recovered by nearly Rs30 per bag during Sep-Oct 2013 in southern region and witnessed declines during Nov-Dec 2013 due to lack of demand and impact of cyclones. Average cement prices for Q3FY14 for southern region are marginally lower than average of Q2FY14.

Western region:

Prices increased by Rs25-30 per bag in western India during Oct 2013 and witnessed further increase of Rs5-10 per bag during Nov 2013 in anticipation of demand revival from infrastructure segment. Howe ver, sharp decline was witnessed in Ahmedabad and Pune by nearly Rs.20 per bag on aggressive selling by players. Prices fell in December as demand did not sustain at same levels.

Eastern region:

Demand was quite low during Oct 2013 in eastern region due to Durg a Puja festival. However, cement prices increased by Rs20 -25 per bag during late Oct 2013, remained largely flat in Nov 2013 and declined by Rs10-15 per bag in Dec 2013.

Profitability under pressure

Profitability is expected to be under pressure in Q3FY14 as well, after a weak Q2FY14, as there has been weak pricing trend, continued cost push in energy and freight and no major benefits of seasonal operating leverage due to weak demand. However, due to improvement in cement realizations, EBITDA per tonne is likely to improve sequentially.

Outlook

A weak demand scenario has impacted the pricing power of cement manufacturers in the country. Thus, despite the increase in cost pressures due to higher freight fares and power costs, cement manufacturers are finding it difficult to pass on the same through price hikes. Further they also do not expect any respite on the cost front going ahead. One can expect infrastructure spending to go up in the coming months due to the elections (though not majorly), which could be a revenue generating opportunity for the sector. Cement prices are also likely to firm up from mid -Jan, 2014. They keep a neutral view on the sector