Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities.
Cement (Sector Update) - Prices, retail sales hold up despite COVID
Despite the ongoing COVID situation, cement demand recovered MoM in June, driven by strong traction in retail sales (semi-urban/rural areas) while non-trade sales continued to decline. Our channel checks suggest sales in north/central/east regions printed flattish to marginal growth. Even in the south and west India, the volume decline rate moderated to ~20-30% YoY in June vs ~40% in May. These factors imply that 1QFY21 sales would decline ~20% YoY in the north and ~40% in the south. Cement prices mostly held up in June, bolstering 1Q realization YoY across the south (+11%), north (+6%), and central (+2%) India. West and east prices are down ~1% and 2% YoY respectively. We believe that falling energy costs could further cushion the impact of dwindling demand on profitability.
Resilient demand in the northern half of India: As per our channel checks, cement sales in the north / central / east regions fell 20-25% YoY in 1QFY21. It implies that demand was fairly strong (flattish to marginal growth) in the month of June! Lower impact of Covid in rural / semi urban areas along with better availability of incoming labourers led to healthy demand in these regions. However, the fall in 1Q sales in the south/west regions was much sharper at ~45%/30% YoY on overall weak demand in the south and larger non-trade share in Maharashtra.
Prices cool off marginally MoM in Jun'20; strong gains QoQ: On the significant price increase taken in April/May, there was a marginal correction MoM across all regions. Trade prices in north / central / east regions cooled off 4/2/2% MoM in June 2020. East prices remained flat MoM. Prices in south moderated 7% MoM (after a spike in April/May). As prices remained firm across all the three months, 1QFY21 trade prices are up 6/5/9/4/26% QoQ.
North/central prices remain buoyant YoY, south flares up: North and central prices further firmed up 6% and 2% YoY respectively on healthy retail demand. South prices buoyed the most (+11% YoY) as companies focused on remunerative pricing amidst a sharp volume decline. Despite the recent hikes, east/west prices are expected to be down 2/1% YoY. Weak YoY pricing in Maharashtra drags west realization down. In the east, pricing is higher YoY in the NE region and in Chhattisgarh (+7% YoY).
Falling energy cost: Petcoke prices (both domestic and imported) cooled off 4% QoQ, leading to a 20-30% YoY decline. Imported coal prices fell sharply during 1Q: South African coal was down 25%/11% QoQ/YoY, and Indonesian coal fell 10%/15% QoQ/YoY. Despite sharp slump in crude prices, the Indian government's sharp tax hikes in June elevated diesel prices by 1/1% YoY/QoQ.