Cement firms with north, central exposure better off than pan-India ones

Robust realizations, coupled with inventory gains from fuel acquired at lower cost, may aid firms with a focus on north and central regions see maximum improvement in operating margins


Shares of most cement companies have outperformed the Sensex on a year-on-year and year-to-date basis, and are trading at rich valuations. Photo: Bloomberg
Shares of most cement companies have outperformed the Sensex on a year-on-year and year-to-date basis, and are trading at rich valuations. Photo: Bloomberg

Market participants know well that the cement industry’s volume growth is likely to be muted in the seasonally weak September quarter due to subdued demand across India. The key therefore for the September quarter results is the movement in cement prices.

Cement companies having substantial exposure to northern and central India are expected to report stronger earnings growth compared to pan-India firms, some cement analysts say. They derive this optimism from the price trends seen in these regions.

On a year-on-year comparison, while pan-India firms will see realizations improve by a modest Rs4/bag, regional disparities continue to remain large with companies in the north reporting Rs35/bag year-on-year and central Rs25/bag year-on-year, brokerage firm Kotak Institutional Equities highlighted in a recent report. On the other hand, cement makers in the east and south will continue to see weakness in price trends, it said.

Robust realizations coupled with inventory gains from fuel, mainly petroleum coke, acquired at lower cost, would aid companies with a focus on the north and central regions to see the maximum improvement in operating margins in the second quarter of fiscal year 2017.

“EBITDA/ton for players in north will improve by Rs 467/ton (+73% YoY) compared to the same period last year, in comparison to more modest improvement of Rs 226/ton (+33% YoY) for pan-India players,” added the Kotak Institutional Equities report. Ebitda stands for earnings before interest, tax, depreciation and amortization.

Meanwhile, demand traction in both these regions continues to be favourable. According to Reliance Securities Ltd, improved demand from the roads and highways segment is already visible, especially in the northern region, and this can be attributed to factors like below-par monsoon and pre-election spending in Punjab and Uttar Pradesh.

Continuing the positive tone, ICICI Securities Ltd’s latest channel check report foresees a maximum pricing increase in the central and northern regions over the next three years, though absolute cement prices would be lower than in the south, it said.

Hence some brokerage firms are of the view that north-based companies like JK Cement Ltd, JK Lakshmi Cement Ltd and Shree Cement Ltd, and firms having a presence in the central region namely HeidelbergCement India Ltd and Prism Cement Ltd are better placed than pan-India cement companies. They expect some of the companies mentioned above to register nearly double-digit volume growth on a year-on-year basis.

Talking about stock performance, shares of most cement companies have outperformed the Sensex on a year-on-year and year-to-date basis, and are trading at rich valuations.

Although valuations are in expensive territory, brokers like Motilal Oswal Securities Ltd feel earnings could surprise positively in FY18, led by realization improvements, particularly in the north/central regions. “In this scenario, we continue preferring companies with higher exposure to north/central regions,” it said.

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