"It has been an unusual quarter for cement stocks": JP Morgan India
Lack of price hikes in a seasonally strong quarter of Q4FY23 and less than expected decline in energy costs is negative for the cement industry. Pinakin Parekh says "It has been an unusual quarter for cement stocks”.
Pinakin Parekh, Executive Director at JP Morgan India, in its interaction with CNBC-TV18 says cement demand remains weak and is broadly similar across various regions of India. Also, this is the first time in many years that the January to March quarter witnessed negligible price hikes. He says “It has been an unusual quarter for cement stocks”. This quarter witnessed new capacities, which put a lid on the cement prices.
He is cautious on the cement industry outlook as a whole, although has an overweight rating on Dalmia, owing to the view that the company continues to deliver on capacity growth funded from internal accruals and valuation discount is expected to narrow.
The Indian cement industry is facing lack of pricing power and to add to it the the new capacity additions. India is in a PAN India cement capacity addition cycle. Parekh says "There is nearly 100 million tonnes of capacity additions in the next two to three years". Most companies have a decent profitability with underleveraged balance sheets. It will be essential for cement demand to continue being high so as to maintain the existing level of profitability.
The Adani group has paid $2.6 billion of the $6.6 billion for Ambuja Cement acquisition debt and as the acquisition debt overhang reduces, it shall open up space for Ambuja and ACC to increase capex and push for capacity additions. Ambuja ramping up its capex is viewed as negative for the broader Indian cement industry, as this could force an aggressive reaction from large incumbents like Ultratech, Shree Cement and Dalmia Cement, which may consider new growth projects or cede their capacity share.
What is seen as negative for the cement industry is the lack of price hikes in a seasonally strong quarter of Q4FY23 and less than expected decline in energy costs. Parekh says “Petcoke prices have cooled off, but remain stubbornly high above $160/tonne”. He further adds that there is a sudden increase in LNG spot imports and gas consumers may see significant cost reductions in coming months. However, in near term he expects LNG prices to remain volatile.
Motilal Oswal Financial Services based on its interactions with channel partners said Indian cement manufacturers may announce discounts and schemes now to meet their year-end volume targets, while they may raise prices from early next month.
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