Cement prices in south India continued to decline, dashing hopes of a recovery in realizations for companies in the region. Prices fell by 12 a bag to a 12-month low of 328 a bag in November, showed the monthly dealer channel check survey by Kotak Institutional Equities. A cement bag weighs 50kg. State-wise, prices fell by 10-15 a bag across Karnataka, Andhra Pradesh and Tamil Nadu.

Demand recovery in the region from the construction sector has been delayed due to sand availability, and floods in Kerala, which have kept prices subdued. Excess supply is also weighing on prices in the tepid demand environment.

Surplus supply is estimated to remain at the highest level in the south compared to other regions at 74 million tonnes in fiscal year 2021, according to Reliance Securities Ltd. What’s even worse is that the supply overhang is expected to remain for a while.

Given rich limestone reserves, especially in Karnataka, cement companies are likely to set up more clinker units in the south to cater to markets in the east and west. According to analyst estimates, south India comprises more than 45% of total limestone reserves in the country, followed by the northern region with about 15%.

The ample supply outlook means that cement prices may not look up in the near term, unless demand revives significantly. This may reflect in growth in realizations for south-based cement producers, even in the December quarter. Since the September quarter was a seasonally weak one, overall earnings performance was anyway muted.

No wonder then that analysts are pencilling in better earnings performance from other regional and pan-India cement companies than southern cement makers.

So, they estimate valuations of south-based companies could correct. Shares of India Cements Ltd, Ramco Cements Ltd, Sagar Cements Ltd and Dalmia Bharat Ltd are trading at a one-year forward price-to-earnings (P-E) multiples of 17-39 times. Pan-India companies such as ACC Ltd, Ambuja Cements Ltd, UltraTech Cement Ltd and Shree Cement Ltd are trading at a one-year forward P-E of 26-40 times.

As for all-India cement prices, they too declined by 5/bag on a month-on-month basis to 320/bag in November, showed the Kotak survey.

“While the drop in imported petroleum coke prices by 17% quarter-on-quarter to USD98/tonne will aid costs, the spreads (difference between prices and energy costs) are down by 1% q-o-q due to lower cement prices," it said in a report.

“We reiterate that a structural (and not just seasonal) improvement in cement prices will require a meaningful increase in industry utilizations. The large capacity addition will keep plant utilization rates low (<70%) over the next two years, per our estimate," Kotak said as it maintained its cautious outlook on the sector.

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