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Cement - 3QFY17 Results Review - A Quiet Quarter - Impacted by Cash Crunch - Reliance Securities

Posted On: 2017-02-23 20:04:27

Sector Review

Cement industry''s 3QFY17 performance was impacted by demonetization drive, which adversely affected demand from IHB and select real estate segment. Despite demand up-tick in Dec''16 owing to calendar year end impact, cement companies under our coverage universe registered a flat YoY growth. Healthy operating efficiencies aided the companies to stay afloat in terms of operating performance. The companies under our coverage witnessed an average EBITDA growth of 4% YoY, despite 2.5% YoY and 6.2% YoY rise in Power & Fuel and Freight cost, respectively. Realizations continued to remain soft despite moderate recovery in Oct''16, as the industry saw an average ~1% sequential contraction in realization.

Notably, most Southern companies recorded healthy volume growth (in double-digit) led by a sharp up-tick in project segment sales and higher banking penetration, which aided in negating the impact of demonetization. UltraTech, JK Lakshmi Cement and Ramco Cements displayed best operating efficiencies as their operating cost/tonne declined by ~3-4% YoY. Holcim (ACC & Ambuja) group saw maximum contraction in sales volume (down 8-9% YoY), whereas India Cements and Ramco Cements witnessed sharpest recovery (+22% YoY for both) in volume. The companies, which reported EBITDA/tonne above Rs750 are: UltraTech (Rs890), Shree Cement (Rs975), Ramco Cements (Rs1,319) and India Cements (Rs797). Looking ahead, we believe performance of cement companies would improve further on the back of likely improvement in realizations and volume.

Volume Impacted by Demonetization

Contrary to the expected sharp recovery in demand owing to favourable monsoon, demonetization drive in early Nov''16 led to a sudden lull in volume growth. The impact of demonetization was noticeably visible in IHB segment, which accounts for >50% of total cement consumption. Consequently, the companies under our coverage saw a flat YoY growth in sales volume. However, most Southern companies recorded healthy volume growth (in double-digit) led by a sharp up-tick in project segment sales and higher banking penetration, which aided in negating the impact of demonetization.

Overall Realization Scenario Remained Dismal

Realization environment was subdued as the companies in our coverage universe saw ~1% sequential decline (flat on YoY comparison) in average realizations. Notably, as per our channel checks done at Dec''16 end, the trade segment price in Western, Northern and Central regions had witnessed 6-7% YoY improvement. However, increased contribution of non-trade segment sales (which commands Rs20-40/bag lower price than trade segment) impacted blended realizations. Looking ahead, we expect that the increasing contribution of non-trade segment sales in ensuing quarters may prevant the companies to report any significant jump in their average realizations.

Operating Cost Broadly Remained Stable despite Surge in Fuel Prices

Though fuel prices especially petcoke surged significantly in 3QFY17 (to the extent of Rs400-500/tonne), operating costs of the industry largely remained stable barring few companies. A consistent endeavour to improve operating synergies though improving fuel mix, reducing lead distance by setting up new GUs, railway sidings, etc aided industry to withstand the impact of higher fuel prices. The companies, which reported EBITDA/tonne above Rs750 are: UltraTech (Rs890), Shree Cement (Rs975), Ramco Cements (Rs1,319) and India Cements (Rs797) on healthy volume and operating efficiencies. Looking ahead, we believe the operating performance of cement companies would improve further on the back of improved utilizations, unlikelihood of any further rise in fuel costs and expected improvement in realizations in busy season.


Source: Equity Bulls

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