Cement Sector Update - Monsoon blues - Delayed monsoon impacts cement demand - Elara Capital

In Aug 2012, aggregate dispatches of 8 cement companies reported de-growth of 2.7% YoY. Even on MoM basis dispatches have fallen by 10.1% as monsoons picked up lately in August. Cement demand was significantly weak YoY in the northern and eastern regions. However cement demand was relatively strong in Gujarat and Tamil Nadu (as Tamil Nadu mainly receives rainfall from the north-east monsoon in Q3).

JK Cement outperforms peers

In Aug 2012, JK Cement reported impressive volume growth of 13.4% YoY due to ramp up of production at Karnataka plant. JK Lakshmi also reported sharp growth of 8.4% YoY due to strong demand in Gujarat and capacity additions. On the other hand, OCL reported decline in dispatches of 16.3% YoY due to weak demand in the eastern region.

Pickup in monsoon hurts prices

With pickup in monsoon, cement prices weakened in most of the regions. Prices fell sharply in Bhubaneswar (~INR50/bag), Hyderabad (~INR44/bag), Lucknow (~INR30/bag) and Jaipur (~INR25/bag). Prices were relatively more stable (down by INR1-5/ bag) in Chennai, Mumbai, Ahmedabad, Kolkata and Chandigarh.

Recommendation and outlook

Average cement prices in Q2FY12 are likely to remain flat QoQ in all regions (other than east). On the cost front, industry is likely to benefit from softening imported coal prices. Freight cost is also likely to come down QoQ as railways do not impose busy season surcharge of 10% in the monsoons. On the flipside, margins are likely to be impacted adversely due to negative impact of operating leverage and higher repairs and maintenance cost as most players undertake maintenance shutdown during lean period. Diesel price increase is also likely to squeeze margins. Thus, we expect margins for the industry even in lean Q2 quarter to be only slightly below Q1 which itself were the highest seen over the last 2 years. Thus we remain bullish on cement stocks and continue to like Shree Cement, JK Cement and JK Lakshmi.

Source : Equity Bulls

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