Construction Materials share price target

However, we expect 4Q realization to be flattish YoY in Maharashtra and lower in south (-7%) and east (-4% YoY) markets, hit hard by weak pricing in 2Q/3Q. North-east prices are 3% higher YoY in 4Q, as per our checks. Thus, companies with large exposure to north/Gujarat/central markets will continue to enjoy realization tailwinds in 4QFY20. Our pan-India dealers check suggests that cement demand and prices have improved across India during Jan/Feb 2020. This has helped cement prices to cumulatively increase by ~Rs15-30/bag during these two months (higher recovery in East). These suggest strong pricing to sustain across North/Gujarat/Central markets (+7-14% YoY in 4QFY20).

Fortunes of the cement industry are set to take a favourable turn led by demand revival, surging cement prices

Strong prices offset the muted volume growth 3QFY20E Overview: Price continues to remain under pressure (3.8% down on QoQ, Rs12-13/bag) during this quarter due to slowdown in construction activity, prolonged monsoon and liquidity problems in Govt. Projects. South and West witness higher prices drop (5% down on QoQ); whereas East and North showed 3% price drop during the same period. Central would be most preferred region during 3QFY20; where prices were...

We recently interacted with some cement players in East and North India to gauge demand and pricing scenario in the regions.

Cement prices have seen sharp decline (Rs9-10/bag) due to fog issue in winter along with slowdown in infra/real estate projects. On demand front, dealers suggested volumes under pressure as ACC, Ambuja and Bharti (Follow Calendar Year as Financial Year) have been pushing excess stocks to achieve end of the year target which further forced price down. However, last 10 days of Dec demand has showed marginal improvement on the account of low cost housing. Our dealer check suggests that all India average prices have declined by 2.7% MoM (Rs9-10/bag) to Rs.314/bag, which is...

(Rs/bag) How ever, maket could absorb hike of only Rs20 due to w eak demand. While prices in Bengaluru fell by Rs10/bag....

(Rs/bag) How ever, maket could absorb hike of only Rs20 due to w eak demand. While prices in Bengaluru fell by Rs10/bag....

Top picks: UltraTech, Dalmia Bharat and JK Cement. We also like Orient Cement owing to its strong earnings recovery in FY20E. Another quarter of flattish sales growth: Cement demand remained weak in 2QFY20, on continued slowdown in construction activities. Liquidity constraints, heavy monsoon and project cancellations in AP drove the slowdown. We, therefore, estimate aggregate sales volume for 11 cement companies under coverage to remain flattish YoY. We expect Star Cement to record 8% volume growth on demand recovery in the north-east region. We estimate UltraTech to deliver 3.5% volume growth mainly aided by inorganic contribution coming from the Binani Cements acquisition. JK Cements 3% volume growth is driven by higher white cement sales. We estimate ~5-15% volume decline for companies with high sales exposure to AP/T markets (Deccan, Orient Cement).

We have been neutral on cement sector for some time now as we believed that moderate demand growth coupled with benign costs should aid decent earnings growth but excessive valuations and supply overhang will curtail the upside. Over the past 3 months, cement stocks have corrected and valuation multiples have come off from highs to reach long term average. However, we are turning cautious on the sector now as we forecast cement demand to contract for the industry in FY20 which will have negative repercussions on pricing and in turn on earnings. We have cut EBITDA forecast for our covered companies by 5-12% for FY21 to factor in...