Construction Materials share price target

(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...

The cement companies we hosted (both listed and unlisted) came in from all the regions North (Wonder Cement), Central (Prism Johnson), East (Emami Cement), West (Sanghi Industries) and South (Bharathi Cement, MyHome Ind and NCL Ind). Orient Cems sales is well spread across west and south markets. Thus, the interactions provided detailed check on the regional demand supply dynamics. The project consultant (to the cement industry) also added valuable insights on the Indian cement sector. In our recently concluded H-Sec Investor Forum, we hosted CXOs of more a dozen companies from the Cement & Building Materials space. We had representation from both listed and unlisted cement companies, a major project consultant to the cement industry and from varied building materials manufacturers

Reviving cement prices and correction in crude oil prices are expected to revive the profitability of cement manufacturers, which were under constant pressure in FY19. Estimated cement prices pan-India grew at an average of 2% YoY and 3% QoQ in 4QFY19. Although a partial rollback was witnessed at the end of the quarter on account of year-end volume push, cement prices saw steep growth, majorly in Southern and Western regions. 11MFY19 volumes (as reported by the Ministry of Commerce) have surged 13% YoY, implying a potential double digit volume growth for the year first time since FY10. Orient...

Infrastructure segment to lead the demand growth Over FY19E-21E, incremental demand of ~40 MT is expected from various projects like low cost housing, which are expected to consume ~13 MT whereas infra projects like road construction and irrigation projects likely to required ~19 MT combined. The ongoing demand traction has also remained strong led by AP-Telangana region, which consumes ~3 MT of cement every month, backed by various schemes like low cost housing, the 2BHK scheme and roads construction. Also ~20% of volumes produced in...

We are bullish on ACC, UltraTech and Dalmia Bharat (Odisha Cement) in the large cap space. In mid-caps, we prefer JK Cement, Star Cement and Deccan Cement. During Q4FY19, overall industry volume grew 9% YoY, even on a high base of last year (+19% YoY). This is the fifth consecutive quarter of high growth. The aggregate sales volume of 11 cement companies under our coverage is estimated to grow 10% YoY. We estimate double digit volume growth from UltraTech, Shree Cement, JK Lakshmi and from south focused Dalmia Bharat, Ramco Cements, and Deccan Cement. In terms of cement pricing trend, our pan-India dealers checks, covering more than 50 cities suggest trade pricing increased 2%/4%/0%/3%/6% QoQ in the north/central/east/west/south regions.

We expect Rs40-50/t savings in energy costs in Q4FY19 due to the decline in petcoke prices. After Q2FY19, pet coke prices were down by 20-22% in the US/Saudi Arabia and 8% in the domestic market. Note that 40% of petcoke used by the industry is imported. We would wait for the price hikes in the South region to stabilize as the prices remain volatile there. Our preferred picks in the sector are ACC, UltraTech and JK Cement. Though South-based companies would see earnings upgrades if current cement prices...

We initiate coverage on construction sector with a positive outlook as we believe that earnings progression of companies will remain robust despite several near term headwinds like ensuing elections and liquidity crunch. Construction sector especially road construction is still an evolving sector in India. Globally, private participation in construction activity is high and various financial models have been evolved for asset ownership. In India, private participation in government projects started only over the last decade. We believe that after learning invaluable lessons over the years, the authorities have been able to wither out various flaws in the models and systems used to award and construct road projects....