After Volume focus, Cement Companies getting back pricing power
Demand may rise further in the medium term, given the seasonality of the construction business.
After a gap of about six months, pricing power appears to be returning to India’s cement industry — at least in the key pockets of consumption. Interactions with dealers and analysts suggested that cement prices have risen in the South and East, with the former recording bigger gains
In the South, prices per 50 kg bag have risen in the range of Rs 20-25, or about Rs 500 a tonne. In the East, in some areas, prices have risen by Rs 10-15 on a 50-kg cement bag.
Greater pricing power should favor manufacturers that have been recording either stagnant or declining operating profit or earnings before interest, tax, depreciation, and amortization (EBITDA) over the past three years. More importantly, if prices in these pockets were to sustain until mid-February, other regions may also report higher retailing rates.
In February this year, all-India average cement prices increased by about 4.5 percent to Rs 330 per 50 kg bag. Cement prices in the northern, western and central regions have been stable, in the range of Rs 290-350 per 50 kg bag.
Since late 2015, cement manufacturers have been following the strategy of garnering volumes to raise utilization in an industry dogged by overcapacity. The Index of Industrial Production (IIP) data of eight core industries showed that cement output expanded 11 percent in December last year.
In recent months, analysts point out that there has been a slight improvement in cement demand from the real estate sector. The housing sector generates about 65 percent of cement demand, of which 35 percent comes from rural housing and the remaining from the urban areas. Infrastructure and commercial segments form 35 percent of cement demand.
The central government’s focus on low-cost housing through the Pradhan Mantri Awas Yojana programme and other key infrastructure projects awarded through the roads and highway ministry should keep cement demand stable in the short run. Demand may rise further in the medium term, given the seasonality of the construction business.
Ramco Cements, Dalmia Bharat, Sagar Cements, Ambuja Cements, and UltraTech Cement is expected to show better realizations in the coming quarters. Given these factors, analysts have raised their earnings estimates for these companies. According to Bloomberg, for FY20, these players are expected to see earnings growth in the range of 18-55 percent.