Why are cement prices in south India correcting?
Cement prices in South India are now down by nearly 2% month-on-month, show dealer channel checks by various brokers
Barring south India, cement prices in other parts of the country have begun to improve after remaining subdued until January, mainly impacted by demonetisation . According to dealer channel checks by various brokers, cement prices in the southern region, which were robust in the past, are now down by nearly 2% month-on-month. Since south-based cement makers saw strong volume growth in the December quarter unfazed by the currency ban, what has pushed cement prices lower now?
Increased competitive intensity, sand procurement issues, and water shortage in some of the markets of Tamil Nadu (TN) and Andhra Pradesh (AP) have hurt demand, thus hurting prices. “Companies did try to undertake hikes in the AP/Telangana (TG) markets, but the hikes didn’t sustain. Versus pre-demonetisation levels, prices are lower at Rs260/bag in AP/TG (versus Rs300/bag in October), at Rs320/bag in Karnataka (versus Rs330/bag), at Rs330-335/bag in TN (versus Rs345/bag),” said a recent Antique Stock Broking Ltd report.
Also, the political situation in TN is still unstable, which may have impacted the state’s spending on infrastructure and allied activities.
Interestingly, apart from the above mentioned factors, the so-called March phenomenon too has a role to play in this price correction. “Generally, in the March quarter, focus of cement companies shifts to pushing volumes, it is very likely that to meet that purpose companies may have taken a price cut,” said Vijay Goel, an analyst at Karvy Stock Broking Ltd.
Some analysts point out the price correction that happened last year in March in some southern cities was steeper than this. Also, given the high volume base of last year, concerns are that volume growth of south-based cement makers may take a hit in the current quarter, so this price correction could also be with a view to minimize the adverse impact on cement volumes by boosting sales. Just like last year, the downward trend in prices is unlikely to last for more than a month and prices may begin to recover from May onwards, added the analysts.
Meanwhile, on a year-to-date basis, shares of some south-based cement firms like India Cements Ltd and Dalmia Bharat Ltd have rallied 35% and 40%, respectively, much higher than pan-India companies UltraTech Cement Ltd (18%), ACC Ltd (5%) and Ambuja Cements Ltd (11%). That’s because, on the valuations front, excluding Dalmia Bharat, the one-year forward price-to-earnings multiple of many south-focused cement makers is lower than the larger pan-India companies.
Editor's Picks »
- Motherson Sumi continues to face margin pressure in foreign markets
- What the Warren Buffett indicator tells us about market valuations today
- Jet Airways lands with a thud in Q4 as fuel costs increase
- IBC amendments: Some dilutions, and a lot more speed
- Patanjali’s gambit is paying off in toothpaste wars