Cement stocks rise; UltraTech, ACC gain 3%, Ambuja Cements hits 52-wk high

 Shares of cement manufacturers were in focus, gaining up to 4 per cent on the BSE on Wednesday on the expectation of improved demand from the urban market and in infrastructure in the coming days due to relaxation of lockdown measures.

Ambuja Cements hit a 52-week high of Rs 234.25, up 4 per cent on the BSE. The company said the board of directors of the company is scheduled to meet on October 22, 2020, to consider the unaudited financial results for the third quarter ended September 30, 2020 (Q3) of the corporate financial year 2020.

UltraTech Cement, ACC, Shree Cement, Dalmia Bharat, India Cements, and Orient Cement were up 1 per cent to 4 per cent. In comparison, the S&P BSE Sensex was up 0.60 per cent at 39,811 points at 11:42 am.

The cement industry demand is slowly improving from the disruption created from Covid-19 due to pent up demand and improved rural demand.

Analysts at Emkay Global Financial Services remain positive on the cement sector and expects industry volume to start improving from the January-March quarter (Q4FY21). Demand recovery in North, Central, and East regions surprised positively after easing of the lockdown norms and there should be a gradual improvement in demand in South/Maharashtra markets. The brokerage firm expects cement prices to improve after the monsoon season.

Meanwhile, analysts at IDBI Capital expect cement industry volume to decline by 15 per cent year-on-year (YoY) in Q2FY21. Post June-20, the decline in the cement volume has increased as pent up demand has faded and monsoon has set in. Average Cement prices at an all India level has declined by 2 per cent quarter-on-quarter (QoQ) and region-wise barring south, and other region has witnessed a decline in cement prices in Q2FY21, the brokerage firm said in an earnings preview.

We would watch for management commentary on cement sales volume expectation for October-March (H2FY21) in the non-trade and trade segment and sector-wise outlook and new opportunity for sales volume, it said.

Covid-19's impact on demand, supply to undermine cement manufacturers

Cement manufacturers in India have seen a significant turn in fortunes with the outbreak of Covid-19. Companies, which had been raising price and pushing volumes from the start of the year, are now staring at supplies coming to a standstill and demand taking a hit.

Cement demand, which started recovering from the beginning of 2020, has suddenly came to a standstill since the second half of March’20 in the wake of nationwide lockdown to combat Covid-19, say analysts. Those at Motilal Oswal Financial Services say that the shutdown has come at the time of peak construction activity and would likely result in nearly 40 per cent volume loss in March.

It is not only the lockdown that will impact volumes, but expectations on weak economic growth, government cuts in spending on infrastructure and real estate demand taking a beating, will also hit volume growth during FY21.

CRISIL expects cement demand in India to contract by 10-15 per cent in FY21 in the base line scenario. However, an extended vulnerability will deepen the damage for the sector to 20-25 per cent, they add.

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In the near term, the challenges will also be posed by a rise in working capital as most of the volumes pushed by companies from the beginning of March are lying with dealers. Binod Modi at Reliance Securities says that companies’ working capital cycle may stretch a bit in Q4FY20 due to non-payment from dealers for unsold inventories.

Realisations, which had remained firm in March, are likely to take a hit too. Though analysts' channel checks suggest that all-India average cement price softened marginally by 0.5 per cent month-on-month to Rs 310-315 per 50-kg bag in March, there was undercutting to the tune of Rs 5-7 per bag being in Tier-II and Tier-III brands. Moving forward, with demand under pressure, cement prices may take a further hit.

The only respite that cement manufacturers may see is on the logistic costs. While soft crude oil prices help, with lower production volumes, transporters are offering more concessions on freight rates which will further help the cost curve, say analysts. Pet coke prices may also remain soft and so may energy costs.

However, with the June quarter that sees peak construction activity likely to remain impacted, all eyes will now be on the second half of FY21.

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While the near-term volume growth outlook is muted, as demand recovers in second half of FY21 UltraTech is well positioned to leverage on it with current utilisation (FY20e) at 74 per cent and pan India presence, says Macquarie research.

JK Cement, too, remains well placed having good exposure to South. Shree Cement, the cost efficient player that has corrected by almost 39 per cent from February highs, too, remains a good bet, say analysts.