Construction Materials share price target

Prism Johnson (Prism) is part of the Rajan Raheja group and is a unique integrated building materials' company, with a wide range of products from cement (43% of FY18 revenue), ready-mixed concrete (24.3% of FY18 revenue), tiles, and bathroom products (30.5% of FY18 revenue). Prism also has a 51% stake in Raheja QBE General Insurance Company Limited, a JV with QBE Group of Australia. Prism has been an industry leader in its tiles...

We remain cautious on most large cap stocks, given demanding valuations and prospects of yet another weak year of growth. Birla Corp and Sanghi Industries remain our key picks in the mid-size space. Cement prices declined ~3.1% in August (flat YoY), following a marginal decline in July, which was essentially an adjustment owing to implementation of GST. Prices in Maharashtra declined ~6-7%, owing to monsoon and RERA weighing on non-trade demand. As a result, prices in West witnessed a decline of 5.2% MoM, followed by markets in the East (-4.4%). In Hyderabad, headline prices declined by ~8% to Rs 295/bag, the lowest since July-2016. Prices in Central (UP and MP) remain broadly unchanged.

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...