Construction Materials    
SECTOR | 12 Jan 2021
Nirmal Bang Institutional
The market is anticipating a seasonal cement price hike in January after consistent Research Analyst declines witnessed over the past few months. Cement stocks have seen a sharp uptick mangesh.bhadang@nirmalbang.com wherein many stocks have gone up by more than 10% over the past week on anticipation +91-22-6273 8068 of price hikes. We spoke to dealers during our channel check to verify whether pricing hikes are on the cards, however, majority of dealer feedback suggests otherwise. Many dealers even suggested that they will be happy if current prices sustain given the sharp declines seen in recent months. Given the factors such as the ongoing CCI investigation and lower than expected demand, we believe that price hikes could be delayed and may...
Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 11 Jan 2021
Cement makers can't keep up with rising demand

by Aakash Athawasya

After falling off a cliff in early 2020-21, India’s economy is expected to limp back to some semblance of normalcy. According to advance estimates by the Central Statistics Office India’s FY 21 GDP is expected to contract by 7.7% In the first quarter of the year, GDP contracted by 23%, and by 7.5% in the quarter ended in September 2020. The central body expects the October-December quarter to show marginal positive growth as commercial activity returns to normal.

One of the key beneficiaries of commercial activity resumption will be the cement industry. As housing demand picks up and infrastructure projects resume, cement production has recovered from the lows seen in April-June 2020. In the face of this rising demand for cement in Q4 and beyond, many cement companies have not only restarted but also increased their capital expenditure (capex) allocation. This is because many cement firms may have to contend with demand outpacing supply.

Capex makes a comeback

Rising capacity and production heading into Q4 will be accompanied by a revival in capex allocation by major cement companies. In the first two quarters of FY21, with little demand and the need to conserve capital, cement companies decreased or deferred capex for the year. Now, as demand comes back, so is capex.

Ultratech Cement announced a capex of Rs 5,470 crore to increase capacity by 12.8 metric tonnes (MT). Earlier this month it raised Rs 1,000 crore by issuing non-convertible debentures. ACC allocated Rs 3,000 crore capex funded through internal accruals, which is expected to come on stream in 2022. In January 2020, it commissioned a new production facility at its Sindri grinding unit increasing capacity by 1.4 metric tonnes per annum (MTPA). 

Shree Cement announced a capex of Rs 1,000 crore expecting to double its current capacity of 35 MTPA in the next 7 years. JK Cement’s capex stands at Rs 1,577 crore in this fiscal year, commissioning 4.2 MT of capacity. JK Lakshmi Cement, under the same parent organization as JK Cement, added a capacity of 2.5 MT at its Udaipur plant for a capex of Rs 1,400.

Some cement companies are instead using funds to reward shareholders and reduce debt. Ambuja Cements did not allocate capex funds for FY21 and paid out a dividend of Rs 17 per share in October 2020, higher than the Rs 3 per share dividend it usually gives out. Heidelberg Cement, reduced net debt to Rs 71,000 crore in September, from Rs 82,000 crore in March. 

Capacity and production recover

In the quarter ended June 2020, the cement industry’s capacity utilization was 52%. It rose to 70% by the end of September 2020 and  80% in November 2020. This shows a gradual return to pre-COVID levels of activity. However, capacity utilization rising on a monthly basis was still disrupted by an insufficient labour force and staggered shift operations.

Production levels are also rising. According to a report by CARE Ratings, the monthly production of cement increased by 3.8% on a YoY basis in October. This was the month in FY21, where cement production was positive on a YoY basis. However, in November, monthly production declined by 7.8% against the year-ago period due to decreasing pent up demand and plateauing infrastructure operations.

Monthly Cement Production

For the first eight months of FY21 (April 2020 to November) production dropped by 19.5% YoY. The severity of the drop was due to the massive production drop in April and May 2020 (86% and 24%) during the lockdown. In March 2020, construction activity was at its peak.

With capex resumption, utilization, and production increasing month-on-month, the total capacity addition is expected to grow at a CAGR of 4.2% between FY21-23, according to ICICI Securities. However, this is lower than the rate of demand stemming from the revival in the housing and infrastructure sector.

Housing and infrastructure revival driving demand

At the end of the September quarter, cement companies saw revenues move up marginally by 3.4% and net profits increase by 62% on a YoY basis. The growth was led by India Cements, Sagar Cements, Orient Cement, and Dalmia Bharat, with net profits increasing in triple digits annually.

In the Q2 earnings call, the management of cement makers said the rise in demand for cement came from rural and semi-urban housing and infrastructure, which contribute over 75% of total industry demand. 

Cement Demand

The central government’s Rs 18,000 crore urban housing scheme under Atmanirbhar Bharat boosted individual real estate projects in rural areas and affordable housing in semi-urban areas. ICICI Securities said companies like Ultratech Cement and Orient Cement which have a larger presence in rural areas will continue to benefit from this demand.

For cement companies catering to urban housing markets, demand may be boosted by state governments decreasing stamp duty. Stamp duty is levied when purchasing a property in order to legalize ownership. A decrease in stamp duty makes buying a new property cheaper. This was done to boost demand for homes.

In August, the Maharashtra government decreased stamp duty to 2% from 5% until December 2020. This had an immediate effect. In Q3, property sale registrations in Mumbai was over 36,000 units, a two-fold jump on a quarterly basis. However, sales will first increase for piled-up properties that will not contribute to cement demand. This might later trickle down to greater real estate demand for new projects due to lower acquisition costs.

The Maharashtra government provided another impetus to the real estate market by slashing all premiums by 50% till December 2021. Real estate companies pay several premiums to state governments which amounts to 25% above the project’s cost.

In November, the Karnataka government reduced stamp duty to 3% from 5% for apartments less than Rs 20 lakh. Other states like Tamil Nadu and Uttar Pradesh are considering reducing stamp duty to help real estate sales. This can provide a fillip to cement demand.

India’s National Investment and Infrastructure Fund (NIIF), an infrastructure-specific fund raised Rs 234 crore from several sovereign-wealth funds and banks in December. The NIIF primarily invests in renewable energy, and roads and highway infrastructure projects. India’s National Investment and Infrastructure Fund (NIIF) will invest some of its corpus under the National Infrastructure Pipeline (NIP) which plans to invest Rs 102 lakh crore in infrastructure projects by FY25. Reliance Securities expects NIP’s infrastructure drive, especially in the construction of ports, airports, motorways, and irrigation canals to boost cement demand by 6%.

The affordability of these housing and infrastructure projects will be helped by low-interest rates said ICICI Securities. With these two sources feeding demand, analysts expect cement demand to increase at a CAGR of 6.3% between FY 21-23. This explains why Ultratech Cement, The Ramco Cements, and JK Cement hit a lifetime high, and Shree Cements, Ambuja Cements, ACC, and Dalmia Bharat hit a 52-week high last month.

Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 09 Jan 2021
Prabhudas Lilladhar
Street is doubtful on sector's ability to increase prices post CCI raids. While, we remain confident that prices would see meaningful increase to help maintain Q3FY21 margins given the peak period of activity and steep surge in fuel cost. We...
Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 08 Jan 2021
ICICI Securities Limited
Average diesel prices are up ~10% YoY, which will lead to a rise in freight cost by | 55/tonne. Also, petcoke prices inched up 26% QoQ (up 35% YoY). However, players switching to coal would help restrict its impact to ~1214%. This would lead to another cost impact of | 90-100/tonne during the quarter. On the other hand, we expect cost rationalisation drive initiated during H1 to keep overall cost of production under check. Also, cement prices despite QoQ correction are up 5.1% YoY. This is expected to lead to...
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Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 07 Jan 2021
Nirmal Bang Institutional
We expect yet another bumper quarter for the cement sector in 3QFY21 despite rising costs and relatively weak pricing (QoQ) as demand recovery has been better. For our coverage universe, we are building in ~8% YoY growth in revenue, driven largely by volume and pricing growth on YoY basis. EBITDA is expected to be higher by 28% YoY as operating costs despite rising on QoQ basis will be lower on YoY basis. Similarly, pricing is expected to be up on YoY basis but down on a sequential basis. Based on DIPP data, cement production in October and November declined by ~2% YoY. With flat or positive volume growth in December, 3QFY21 production should be flat or marginally lower YoY. However, based on our channel checks, we expect demand growth of ~4-6% YoY for the...
Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 06 Jan 2021
Nirmal Bang Institutional
With shortage of labour and monsoon behind us along with government's focus on infrastructure spending, we expect 3QFY21 to be a good quarter for all our covered construction companies. During FY21 (till November 2020), the length awarded and constructed by MoRTH was 6,764kms and 6,207kms, respectively, whereas in FY20 the same was 8,948kms and 10,237kms, respectively. So, despite the Covid-19 pandemic, the authority has been able to perform better on both awarding as well as construction activities. Furthermore, the government has decided to extend the benefits provided under Covid-19 relief measures from 31st December 2020 up to 30th June 2021, which will further help to strengthen the liquidity position of the companies. With...
Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 24 Dec 2020
Prabhudas Lilladhar
Prefer Ambuja (ACEM) over ACC due to upcoming expansion in North Board of Directors of ACC and ACEM approved renewal of TKH fees for next couple of years effective 1st January, 2021 at existing rate of 1% of net sales. Both the stocks have been under pressure for last one month due to overhang on the status of fees. Status quo on fees would help to retain investor sentiments as any increase in fees would have further escalated the below average performance on margins and volume growth. We maintain BUY on ACC and ACEM with revised TP of Rs1,770 and Rs280 respectively based on...
Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 24 Dec 2020
Prabhudas Lilladhar
Prefer Ambuja (ACEM) over ACC due to upcoming expansion in North Board of Directors of ACC and ACEM approved renewal of TKH fees for next couple of years effective 1st January, 2021 at existing rate of 1% of net sales. Both the stocks have been under pressure for last one month due to overhang on the status of fees. Status quo on fees would help to retain investor sentiments as any increase in fees would have further escalated the below average performance on margins and volume growth. We maintain BUY on ACC and ACEM with revised TP of Rs1,770 and Rs280 respectively based on...
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Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 17 Dec 2020
Nirmal Bang Institutional
Based on our channel checks, cement prices have remained firm throughout the Research Analyst country barring the East and South regions, where prices have corrected mangesh.bhadang@nirmalbang.com meaningfully. Given the news that the Competition Commission of India (CCI) is +91-22-6273 8068 investigating cement companies for price collusion and various industry bodies...
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Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.
Construction Materials    
SECTOR | 09 Dec 2020
Nirmal Bang Institutional
Earnings drivers gaining momentum; valuation still attractive We believe that the construction sector stocks are set to outperform as earnings growth is set to pick up with increased execution coupled with reduction in working capital. Strong orderbook, controlled working capital, ability to recycle capital through sale of assets and positive regulatory changes in the sector all bode well for these companies. In this note, we look at various regulatory changes initiated by the NHAI and its impact on the construction companies. We have a positive view on the sector with Buy rating on all the stocks under...
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Nirmal Bang Institutional released a Sector Update report for Construction Materials on 12 Jan, 2021.