January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Realizations Softened on Insipid Demand

Demand environment continued to remain dismal in Dec16 led by impact of demonetization, which XX We continue to believe that this is just a temporary postponement of demand, which will
affected trade segment sales in most pockets. However, price cut (-2.2% m-o-m) undertaken by improve with the rise in circulation of currency, which will essentially lead to better demand
the industry aided monthly demand to improve as most companies saw a monthly volume uptick from IHB segment that accounts for >50% of total consumption. Given the sharp hike in
in the range of ~5-15%. Notably, there has been a pickup in the construction of selected real fuel prices and likely full impact of wage hikes, we envisage an imminent price hike in the
near-term.
estate projects as many developers intend to complete their projects before the implementation of
new Real Estate Bill. Though all India average cement price has been subdued and declined 2.2% Exhibit 1: Region-wise average cement prices (Rs/bag)
month-on-month (m-o-m) in Dec16, average price increased by ~4.3% yoy mainly on account Regions Dec16 Dec15 yoy % Nov16 mom %
of sharp yoy improvement in Northern (+15.8% yoy) & Western realizations (+8.9% yoy). Notably,
North 278 240 15.8 283 (1.8)
there had been a sharp price drop in Northern & Western regions in Dec15 (~Rs30/bag) led by
South 346 350 (1.1) 348 (0.6)
price cut taken by the companies to push volume so as to meet year-end sales target. Further,
barring Southern markets, all regions saw a price correction of ~2-4% m-o-m in Dec16. West 294 270 8.9 303 (3.0)
East 279 292 (4.5) 285 (2.1)
3QFY17E: Cement sales volume is expected to be dismal for cement companies due to cash
Central 279 263 6.1 290 (3.8)
crunch across the country following demonetization drive which dragged demand in trade as well
as IHB segments. Further, impact of hike in fuel price and wage are likely to drag margins. Further, All India Avg. 295 283 4.3 302 (2.2)
we foresee that average cement price is up by ~1.9% yoy and down by ~1.1% m-o-m during the Source: RSec Research
3QFY17.
Exhibit 2: A snapshot of quarterly average cement prices (Rs/bag)
Key Takeaways Regions 3QFY17E 3QFY16 yoy % 2QFY17 qoq %
XX Most dealers are of the view that demand is likely to remain moderate in Jan17 and expect North 283 265 6.8 291 (2.9)
to bounce back in Feb17 with the more improvement in currency circulation, likely lifting of
South 349 355 (1.9) 353 (1.1)
bank withdrawal limit and ease in winter / wedding seasons. They further cite that pricing are
unlikely to see any further correction in many pockets and expect a gradual recovery with the West 303 286 5.8 286 5.7
pick-up in demand environment. East 284 301 (5.8) 296 (4.2)
XX Unlike expectations, price cut (-2.2% m-o-m) undertaken by the industry aided improvement Central 286 269 6.3 295 (3.0)
in monthly demand as most companies saw a monthly volume uptick in the range of ~5- All India Avg. 301 295 1.9 304 (1.1)
15%.
Source: RSec Research
XX Though all India average cement price has been subdued and declined 2.2% m-o-m in
Dec16, average price increased by ~4.3% yoy mainly on account of sharp yoy improvement
Result Picks
in Northern (+15.8% yoy) & Western realizations (+8.9% yoy).
XX UltraTech Cement & Ramco Cements
XX Notably, there had been a sharp price drop in Northern & Western regions in Dec15 (~Rs30/
bag) led by price cut undertaken by the companies to push volume so as to meet year-end Research Analyst: Binod Modi
sales target. Further, barring Southern markets, all regions saw a price correction of ~2-4% Contact: (022) 3320 1097
m-o-m in Dec16. Email: binod.modi@relianceada.com

1
 January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Northern Region: Prices corrected by ~2% m-o-m Exhibit 3: Northern cement pricing over the years
hh Having seen a substantial price increase during Feb-Jun16 (+Rs70-80/bag), the prices in 340

Northern region have consistently been in Southward trajectory since July16 and corrected 320
by ~Rs30-35/bag over 2HCY16. 300
hh However, the prices still appear robust on yoy basis being higher by ~16% yoy post factoring 280
~1.8% m-o-m correction in Dec16 mainly on account of steep fall in Dec15 due to price

(Rs)
260
war between companies before the closing of calendar year. Average cement price in region
240
currently rules at ~Rs275-280/bag.
220
hh Prices in Delhi/NCR remained flat m-o-m in Dec16. However, it improved by ~Rs8-10/bag
from 3rd Jan17 and currently rules at ~Rs265-270/bag. As per the dealers, sales volume 200

Jul-08

Jul-13

Jul-16
May-12
Oct-07

Jan-10

Oct-10

Jan-15

Oct-15
Jun-10

Dec-11

Sep-12

Jun-15

Dec-16
Nov-08

Nov-13
Feb-08

Feb-13
Apr-09

Apr-14
Mar-11

Mar-16
Aug-09

Aug-11

Aug-14
in retail trade remained subdued and witnessed moderate improvement m-o-m in Dec16.
In their view, demand is still down by ~15-20%, and they expect recovery from next month.
Price (Rs/bag)
However, the prices are expected to improve by ~Rs8-10/bag shortly.
Source: RSec Research
hh Prices in Jaipur corrected by ~Rs8-10/bag m-o-m to ~Rs255-260/bag. Sales volumes
declined by 10-15% in trade segment led by cash crunch and wedding season. The dealers
expect Jan17 to be better with the ease in winter and improvement in currency circulation. Exhibit 4: Northern cement price as on end of Dec16

hh Prices in Amritsar markets remained flat m-o-m to Rs330-335/bag. Dealers said that better 290

demand from project segment aided volume growth. Further, price hike of Pakistani cements 280

also led to better demand for domestic brands. 270

260
hh In Chandigarh, prices moderately corrected by Rs3-5/bag m-o-m, while the average price
250
currently rules at ~Rs315-320/bag. Dealers cited that sales volume in Dec16 was better on (Rs) 240
m-o-m due to aggressive selling by some of brands especially in project segment. There is a
230
wide gap of ~Rs60-70/bag between project and non-project price.
220
hh We believe that demand and pricing scenario in Northern markets are likely to improve from 210
Jan16 onwards on the back of improvement of government expenditures in Northern region 200
and pick-up in infrastructure projects in general. Further, as no meaningful capacity addition Dec'2015 Nov'2016 Dec'2016
is expected in the region in next 2-3 years, we believe that a favourable demand scenario will Price/bag
aid the region to witness healthy pricing environment in ensuing years. Source: RSec Research
hh 3QFY17E: Average price during 3QFY17E is expected to have increased by ~7% yoy and
declined by ~3% qoq.
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 January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Southern Region: Prices remained resilient but softened marginally on yoy basis Exhibit 5: Southern cement pricing over the years
hh Average price in Southern markets remained resilient and saw a marginal drop of 0.6% 380
360
m-o-m mainly due to moderate price correction in AP/Telangana markets.
340
hh Currently, average prices are hovering at ~Rs345-350/bag (-1.1% yoy & -0.6% m-o-m) range. 320
300
hh Prices in Telangana/AP markets declined marginally by ~Rs3-5/bag m-o-m to ~Rs305-310/ 280

(Rs)
bag. Despite being better on m-o-m basis, sales continued to remain dismal on yoy basis 260
as several government projects are at initial stage of development. Dealers further cited that 240

there had been an announcement of price hikes, which could not materialize owing to lack of 220
200
demand. However, the demand is expected to pick-up from Feb17 onwards with the pick-
180
up in government projects.

Feb-08

Feb-13
Apr-09

Apr-14
Mar-11

Mar-16
Jul-08

Jul-13

Jul-16
May-12
Oct-07

Jan-10

Oct-10

Jan-15

Oct-15
Aug-09

Jun-10

Aug-11

Dec-11

Sep-12

Aug-14

Jun-15

Dec-16
Nov-08

Nov-13
hh In Chennai, prices remained flat at ~Rs380-385/bag (Trade) and non-trade price at Rs340-
350/bag. Demise of Jayalalithaa and cyclone in the state took a toll on demand. However, Price (Rs/bag)

dealers expect demand to recover from current month onwards and the prices are expected Source: RSec Research
to remain in the range bound.

hh The prices in Bangalore too remained flat m-o-m to ~Rs370-375/bag with marginal uptick in Exhibit 6: Southern cement price as on end of Dec16
volume m-o-m. Further, the demand in Ernakulam (Kerala) continued to remain dismal and 400
prices remained flat m-o-m at ~Rs380-390/bag.
350
hh 3QFY17E: Average price during 3QFY17E is expected to have declined by ~2% yoy and
~1% qoq.
300

(Rs)
250

200

150
Dec'2015 Nov'2016 Dec'2016

Price/bag

Source: RSec Research

3
 January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Western Region: Prices corrected by ~3.0% m-o-m Exhibit 7: Western cement pricing over the years
hh Having seen a price recovery of Rs35-40/bag during Sept-Oct16 period, average price 360
in Western region has been in downward trajectory for last two months and corrected by 340

~3.0% m-o-m in Dec16 on account of sharp price correction in South Maharashtra & Gujarat 320

markets. Currently, the average prices rule at ~Rs290-295bag (+8.9% yoy & -3.0% m-o-m). 300

280
hh Prices in Mumbai including Thane & Navi Mumbai continued to remain flat m-o-m at

(Rs)
260
Rs315-320. According to the dealers demand rose by ~15-20% m-o-m in Dec16 in trade 240
retail segment. However, in non-trade segment the prices corrected by ~Rs10-15/bag 220
m-o-m. Further, prices are expected to increase by ~Rs10/bag shortly. 200

180
hh South Maharashtra has seen a sharp decline in prices after three months and corrected by

Jul-08

Jul-13

Jul-16
May-12
Oct-07

Jan-10

Oct-10

Jan-15

Oct-15
Jun-10

Dec-11

Sep-12

Jun-15

Dec-16
Nov-08

Nov-13
Feb-08

Feb-13
Apr-09

Apr-14
Mar-11

Mar-16
Aug-09

Aug-11

Aug-14
~Rs15-20/bag on the backdrop steep price cut by the companies to push volume before
the end of calendar year. Average price is currently ruling at around Rs280-285/bag. Sales Price (Rs/bag)
volume improved m-o-m by ~15-20% in trade segment. Dealers cited that the prices are
Source: RSec Research
likely to make a strong bounce back in next 5-7 days and hinted a price hike to the tune of
Rs20-30/bag. However, the demand scenario continued to remain bleak due to cash crunch
and sand issues in several pockets. Exhibit 8: Western cement price as on end of Dec16

hh Prices in Pune recovered by ~Rs8-10/bag m-o-m to Rs295-300/bag with moderate pick- 320

up in demand. Dealers expect demand to improve further from Feb17 onwards. However, 300
according to them prices are likely to be increased further in coming days by ~Rs20-25/bag.
280
hh Prices in Ahmedabad (Gujarat) corrected by ~Rs10-15/bag to Rs225-230/bag as calendar
(Rs)
year end led to several companies to undertake a price cut so as to increase sales, which 260

rose by 15-20% m-o-m. Dealers cited that as the prices have bottomed out now and there 240
is a likely recovery in pricing scenario shortly.
220
hh 3QFY17E: Average price during 3QFY17E is expected to have increased by ~5.8% yoy and
~5.7% qoq. 200
Dec'2015 Nov'2016 Dec'2016

Price/bag

Source: RSec Research

4
 January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Eastern Region: Prices corrected by ~2.1% m-o-m Exhibit 9: Eastern cement pricing over the years
hh Despite seeing better demand compared to other regions, average prices have consistently 360
been on southward trajectory mainly owing to oversupply created in the region and new 340
entrants. Average price in Eastern region declined by 2.1% m-o-m to ~Rs275-280/bag in 320
Dec16. 300

hh In Kolkata, prices corrected by Rs15-20/bag m-o-m to ~Rs305-310/bag, as the demand 280

(Rs)
continued to remain bleak in retail trade after sudden cash crunch following demonetization. 260

However, dealers expect a moderate recovery in prices in current month so as to pass on 240

increased cost of production. 220

200
hh In Patna, prices corrected marginally by ~Rs3-5/bag to ~Rs300-305/bag. As per the dealers,

Feb-10

Feb-13
Apr-11

Apr-14
Mar-08

Mar-16
Jul-10

Jul-13
May-09

May-12
Jan-12

Oct-12

Jan-15

Oct-15
Aug-08

Dec-08

Sep-09

Aug-11

Dec-13

Sep-14

Jun-15

Aug-16

Dec-16
Nov-07

Nov-10
their sales volume in trade witnessed a moderate uptick m-o-m but continued to remain
subdued on yoy basis. Lack of ATMs and banking facilities in remote area of Bihar have Price (Rs/bag)
impacted demand in a big way in the short-term. They expect a better demand scenario
Source: RSec Research
from Feb17 onwards.
hh In Bhubaneswar, prices remained flat m-o-m at Rs270-275/bag. Dealers say that volume
Exhibit 10: Eastern cement price as on end of Dec16
push led to better sales on m-o-m basis, but flat on yoy basis. Government projects are the
key supporting factor of demand as of now. However, upcoming Gram Panchayat elections 300

in Odisha may impact demand in the near-term.

290
hh In Raipur (Chhattisgarh), prices remained flat m-o-m at ~Rs215-220/bag. Sales volume was
marginally better m-o-m. However, there has been a further price cut of Rs8-10/bag from 280
January 01, 2017. (Rs)
270
hh 3QFY17E: Average price during 3QFY17E is expected to have declined by ~5.8% yoy and
~4.2% qoq. 260

250
Dec'2015 Nov'2016 Dec'2016

Price/bag

Source: RSec Research

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 January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Central Region: Prices softened by ~3.8% m-o-m but still firm Exhibit 11: Central cement pricing over the years
hh Cement prices in most part of the region remained resilient and firm in Dec16. A substantial
340
price correction in Western UP markets led to average fall of ~Rs10-12/bag m-o-m and
320
average cement prices are currently ruling at around ~Rs275-280/bag.
300

hh In Bhopal, the prices remained broadly flat m-o-m at ~Rs295-300/bag. Dealers cited that 280

there has been a moderate improvement in sales in Dec16. They expect that the prices may

(Rs)
260
improve by ~Rs10/bag in Jan17. 240

220
hh Prices in Lucknow remained flat m-o-m at ~Rs275-280/bag. Sales volumes were better
m-o-m on account of closing month. Dealers said that ongoing construction of Metro Rail 200

Feb-08

Feb-13
Apr-09

Apr-14
Mar-11

Mar-16
Jul-08

Jul-13

Jul-16
May-12
Oct-07

Jan-10

Oct-10

Jan-15

Oct-15
Aug-09

Jun-10

Aug-11

Dec-11

Sep-12

Aug-14

Jun-15

Dec-16
Nov-08

Nov-13
and other road projects are continuing to support demand. However, further improvement in
demand scenario would be possible only post election, when new projects will start coming
Price (Rs/bag)
in.
Source: RSec Research
hh In Agra (Western UP), prices contracted by ~Rs25-30/bag m-o-m to ~Rs265-275/bag. A
steep price cut mainly led to increased sales volume and is expected to recover in current
Exhibit 12: Central cement price as on end of Dec16
month. Dealers believe that demand scenario would improve post the Assembly Elections
in UP. 300
290
hh 3QFY17E: Average price during 3QFY17E is expected to have increased by ~6.3% yoy and 280
declined by ~3.0% qoq. 270
260

(Rs)
250
240
230
220
210
200
Dec'2015 Nov'2016 Dec'2016

Price/bag

Source: RSec Research

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 January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Exhibit 13: A synopsis of change in cement prices month-on-month (%)

Source: RSec Research

7
 January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Outlook and Valuation

Demand environment which took a hit following demonetization is expected to see a moderate improvement from current quarter. Hence, unlike our earlier expectation of demand growth of
~5.5% for FY17E, we foresee demand growth should be in the range of ~1-2% for the current fiscal. We expect a strong recovery in FY18E on the back of (a) low base; (b) pick-up in infrastructure
consumption; (c) improvement in rural demand; and (d) likely traction in governments Housing for All scheme. An improvement in liquidity with the banks extending support to all fund-starved
infrastructure projects especially Irrigation, Railways, Road & Highways, etc. Notably, slower capacity addition and incremental demand from proposed Housing for All scheme, Smart City projects
and commencement of construction of Metro/Irrigation projects are likely to aid in improving utilizations of the industry and hence profitability in the long-term. We firmly believe that the cement industry
is a perfect play of infrastructure boost in India owing to better balance-sheet of cement companies and likely improvement in return ratios, which will aid companies to get re-rated in ensuing quarters.
We maintain our positive stance on UltraTech Cement in Large-cap space, while in Mid-cap space we prefer J.K. Cement, JK Lakshmi Cement, Ramco Cements & Mangalam Cement

Exhibit 14: Valuations table

CMP* Recommendation Target Price M.Cap EV/tonne (US$) EV/EBITDA (x) RoE (%)
(Rs) (Rs) (Rs bn) FY18E FY19E FY18E FY19E FY18E FY19E
ACC Ltd 1,328 BUY 1,610 250 106 106 12.5 9.0 11.6 14.8
Ambuja Cements 211 BUY 275 419 130 128 11.5 9.1 7.9 9.0
UltraTech Cement 3,292 BUY 4,300 903 197 186 14.9 10.6 12.8 18.3
Shree Cement 14,389 HOLD 14,000 501 240 233 15.8 13.8 19.0 17.4
Ramco Cements 575 BUY 650 137 159 149 10.9 8.8 19.0 21.8
India Cements 127 BUY 165 39 68 64 6.5 5.4 8.8 13.7
J.K. Cement 718 BUY 1,000 50 87 81 8.6 6.8 15.7 18.5
JK Lakshmi Cement 358 BUY 500 42 63 57 9.5 6.3 12.4 19.6
Mangalam Cement 270 BUY 410 7 45 40 5.5 4.2 12.7 14.3
HeidelbergCement India 110 BUY 145 25 87 78 9.5 6.8 13.2 17.0
Sagar Cements 660 BUY 730 11 56 53 9.6 6.0 7.7 16.6
Source: Company, RSec Research ; Note: *CMP as on January 09, 2017, ^December end companies, # Ambujas valuations include its 50.01% stake in ACC

8
 January 09, 2017 Cement | India

Institutional Equity Research Monthly Sector Update

Rating Guides
Rating Expected absolute returns (%) over 12 months
BUY >10%
HOLD -5% to 10%
REDUCE >-5%

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