Earnings weakness persists. An adverse combination of weak volumes, muted prices and increasing costs will put pressure on earnings of cement companies. Save for a few regional names, we expect EBITDA decline of up to 15% yoy. Regional names will likely report better volume growth as they continue to gain market share on expanded capacity base. Rich valuations and continued earnings risk prevent us from taking a constructive stance on pan-India players.
All-India cement price down Rs8/bag qoq; demand weak in early 4QFY17 but improves in March
All-India cement prices were down by Rs8/bag qoq in 4QFY17, though regional disparities continued. As per our channel checks, prices were marginally up (Rs1/bag qoq) in north India while it declined in most other regions—price decline was more severe in the west (-Rs21/bag qoq) and south markets (-Rs11/bag) but moderate in central & east India (-Rs2 to 6/bag). In our coverage universe, we expect 2-4% qoq decline in realizations for pan-India names, flat or marginal increase qoq for north based names (Shree Cement, JK Cement and JK Lakshmi) and 1-3% decline for south based names. Orient Cement may report weak realizations (-5% qoq) due to the sharp pull back in prices in Maharashtra.
Volume trajectory at variance—regional names to gain share at expense of pan-India companies
We expect 2% yoy growth in cement volumes for our coverage universe. Cement volumes (per DIPP) declined by 14.5% in January-February 2017 though our checks indicate that demand accelerated in March 2017 to make good the weakness in the early part of the quarter. Weakness in volumes for the early part of the quarter reflects the after effects of demonetization as inventories increased in the distribution channels immediately post demonetization (November - December 2016) which also depressed sales in January - February 2017, besides lowering retail sales due to cash shortage, per our checks. We expect flat yoy volumes for pan-India names and moderate growth from regional players—mid-sized companies will continue to gain market share.
Costs will continue to trend higher led by pet-coke price increases
We expect sequential increase in costs due to higher pet-coke prices, as previous quarters partially benefitted from low priced carry over inventories. We highlight that while average pet-coke prices increased by 11% qoq in 3QFY17 (after 44% qoq increase in 2QFY17), low cost inventories (1-1.5 months of inventories depending on the company) had absorbed some of the cost impact in 3QFY17. Pet-coke prices again firmed up in March 2017 by 10-12% due to strengthening demand after some pricing weakness seen in February 2017.
Overall, we expect a weak quarter with 1-15% yoy EBITDA decline for pan-India names
We expect EBITDA for pan-India names to decline by 1-15% yoy led by increasing cost pressures (fuel)—decline will be more severe for ACC and Ambuja as they continue to lose market share. We expect Shree Cement's EBITDA to increase by 10% yoy despite increase in pet-coke costs, led by higher yoy realizations in north markets and better volumes. Among regional names, we expect EBITDA to decline by 1-5% yoy for JK Cement, JK Lakshmi, India Cements and Dalmia Bharat. We expect Orient Cement's EBITDA to decline by 14% yoy due to sharp decline in cement prices in the west during the quarter. We prefer mid cap names over large caps owing to more reasonable valuations. On an average, large cap cement stocks are trading at 15-18X EV/EBITDA on FY2018E earnings, while mid-cap stocks are trading at 8-11X EV/EBITDA.