Construction Materials share price target

We maintain BUY on JKIL, change KNR Constructions and ITD Cementation rating from `Neutral? to `Under Review?. Other coverage stocks are being downgraded to `Neutral? from `BUY?, even as we await more strategic clarity across the sector this quarter.

The lagged impact of demonetisation and a strong base (volume growth of the cement industry in 4QFY16 was ~16%) are likely to impact 4QFY17 volume growth, resulting in one of the weakest peak seasons on record. We expect our coverage universe to deliver 1.7% growth in volumes in 4QFY17. Of the companies, Shree Cement is expected to deliver 11% volume growth, while the rest would deliver flat YoY volumes.

As against our expectations of better pricing power, cement prices pan-India are down 1%. On volumes, cement companies are divided. The jury on Pan-India India players is out. Regionals may benefit from specific pockets like Satna Cluster or Telengana. Further, the crude-linked pet coke prices are moving up. With poor pricing power and below base-case capacity utilization, we suspect the future of rosy valuations ahead. First, cement pricing worse-than-our expectations!...

The impact of demonetisation hit the cement industry hard, with January volumes down 13% YoY (vs 9% in December). Our channel checks across the country show that cement demand, though still weak, is now recovering from the effect of this move. Though states undergoing political processes (UP and Punjab) are an exception to this recovery as of now, there is a possibility that demand may pick up once the once government formation is complete.

The impact of demonetisation hit the cement industry hard, with January volumes down 13% YoY (vs 9% in December). Our channel checks across the country show that cement demand, though still weak, is now recovering from the effect of this move. Though states undergoing political processes (UP and Punjab) are an exception to this recovery as of now, there is a possibility that demand may pick up once the once government formation is complete.

Cement industry's 3QFY17 performance was impacted by demonetization drive, which adversely Overall Realization Scenario Remained Dismal affected demand from IHB and select real estate segment. Despite demand up-tick in Dec'16 Realization environment was subdued as the companies in our coverage universe saw ~1% owing to calendar year end impact, cement companies under our coverage universe registered sequential decline (flat on YoY comparison) in average realizations. Notably, as per our channel a flat YoY growth. Healthy operating efficiencies aided the companies to stay afloat in terms checks done at Dec'16 end, the trade segment price in Western, Northern and Central regions had...

Housing and construction are the sectors most impacted by demonetization. While market participants aver things will normalize in 3-6 months, the impact is enough to postpone the much awaited recovery in cement demand by another year or so. Further, we fear a longer slump in secondary/unorganized real estate markets which drive a large proportion of cement sales (IHB). We also do not believe that a rebound in infrastructure demand will be enough to offset the above-mentioned slump in housing.

Prefer KNR, NCC, PNC Infra on back of pure play EPC focus. We expect EPC players valuation multiples to expand on back of strong order intake, balance sheet deleveraging & lower interest rates.

Cement stocks have rallied ~40%/13% in trailing 12M/3M period given expectations of strengthening volumes, weaker capacity additions and prolonged periods of strong pricing. Large cap cement stocks now trade at 10.5-16.5x FY18 EV/EBITDA and these valuations do not have any room for disappointments. We remain focused on select midcaps (Sanghi, Birla Corp). We have increased the target prices for stocks, largely driven by higher multiples

Inampro (Platform for Infrastructure and Materials Providers) was created in 2015 to set up Government sourcing of cement (and later steel/other construction inputs) directly from producers. It received widespread attention, primarily due to few (very low) rates quoted at the time (Rs 120/bag). However, the initiative did not take off. Order quantities remain dismal. Our takeaways from a quick revisit to the portal