Key Sector Data Market Cap (Rs Crore) 203585 Market Cap (USD million) 32912 P/E        34.6 P/BV          3.5 Debt/Equity          0.4 ROA (%)          6.4 ROE (%)        10.2 EV/Sales          2.8 EV/EBITDA        15.9

Soft coal & crude prices boost industry margins

International coal and pet coke prices declined around 20-25% from the peak level seen a year back and are at multi-year low levels. Weak demand from the Euro zone and China should restrict any large up-tick in coal prices over the next 2-3 quarters. Hence, power costs would remain benign for the Indian cement industry going forward.

International crude prices also slid by around 35% over the last four months on lower demand and aggressive supply. With the lowering of crude prices, diesel prices in India has been rolled back by Rs 5.62 per litre since October, which is around 50% of total diesel price hike taken over the preceding one and half years. The dual benefits of lower freight costs for finished as well as raw material should be seen in subsequent quarters, thereby, will further boost the cement industry operating margins.

Valuation of the Cement sector looks fairly attractive in spite of higher P/E of 34.6X and EV/EBITDA at 15.9x considering cement demand and prices rosy outlook. The industry is moving towards better days ahead led by firming up of demand outlook and softening operating cost pressure.

Cement prices likely to remain soft in December

Cement prices usually start rising from September when construction activity resumes after a lull during the monsoon. This time around, the trend seems to have reversed. Improved realization, on the back of robust cement prices that held up since January, did not sustain in October. The key reason is weak demand, which hinges on capital and infrastructure expenditure. In fact, even the 5.5% year-on-year volume growth for cement in the September quarter was lower than that posted in the previous two quarters. The outlook on government spending is worrisome. After increasing 30% YoY in September 2014, government spending contracted 11% last month, implying a growth of 4.3% in YTD 2014-15, as against 18.3% YoY.

Cement prices have fallen in multiple regions during October-November as demand slowed down against expectations of a pickup after the festive season. Northern and eastern states have seen the sharpest dip of around Rs.10-30 per 50 kg bag of cement. A few pockets in the west and south are looking stable, although lack of major project announcements may see prices slip in December again, as supply exceeds absorption of cement.

Cement price is expected to remain soft in December 2014 after a drop in multiple regions last month, as of weak demand due to lack of major project announcements and as supply exceeds absorption of cement. However, the demand is likely to see momentum in the next couple of months given the cyclical upturn in the economy and the expected policy push to drive investments in the infrastructure sector by the new pro-development government at the centre.

All-India average cement price declined Rs13 per bag (of 50 kilogram) in November 2014. Among the regions, there was correction in across the regions, with the northern and southern market had seen more correction due to tough demand environment as compared with the other markets.

Northern region- The average price of cement in the northern region declined 11% month on month (MoM) in November 2014, on account of lower demand from real estate space and lower take off from infrastructure.

Southern region- The average price of cement in the southern region declined by 6% MoM in the period under review on account of lower government spending on infrastructure activities and demand from housing sector is one of the worst in recent years. Also, no sign of pick-up in demand for cement is seen from Hyderabad (one of the key cement market in south) post formation of stable government in Telangana and Seemandhara.

Central region- Average cement prices in the central region declined by 4% MoM in November 2014 on account of lower offtake from real estate sector.

Eastern region-The price of cement in the eastern region declined by 3% MoM in November 2014 on account of a slowdown in demand from infrastructure and real estate space.

Western region- The average price of cement in the western region declined marginally 2% MoM in November 2014ue to a slowdown in infrastructure activity and dull housing activity in rural areas.

India has the second largest installed cement capacity in the world after China. With total capacity of approximately 347 MTPA, India accounts for close to 8% of the total global production. The housing sector is the biggest demand driver of cement, accounting for about 67% of the total consumption. The other major consumers of cement include infrastructure, commercial construction and industrial construction.

Construction industry in India- The construction industry in India has been a significant contributor to GDP and as per planning commission data it contributes close to 8% of GDP. The construction industry can be broadly classified under three main sectors; Infrastructure, Real estate and Industrial. Of the three, Infrastructure and real estate holds the major share.

The major boost to the infrastructure space in India is largely through government initiatives. As per World Economic Forum, India significantly lags behind in Infrastructure not only as compared to developed nations but many developing nations in its Asian neighborhood. Taking cognizance of this fact, the country has been significantly increasing its planned outlay in infrastructure sector over the last three five-year plan.

The planned outlay has nearly doubled to Rs 5230900 Crore in 12th Five year plan from Rs 20,56,1 50 Crore in 11th Five year plan. This would act as a significant boost for the infrastructure construction sector.

The real estate sector is witnessing growth due to migration from villages to cities, rise in the number of middle-class and strong growth in the rural India. The real estate prices have witnessed significant fall in India when it was hit by the global financial crisis in 2008-09. However, with the pace with which the real estate prices in India have bounced back, depicts the humongous demand for housing. As per the estimates of a report by CRISIL research, even after significant growth in real estate construction over the last decade, there is substantial shortage of housing in India. Hence the real estate industry holds huge growth opportunity in India.

Capacity utilization: The cement industry has been experiencing a mismatch between supply and demand. The industry has created capacity on the back of government's projection of potential cement demand arising out of the thrust given for infrastructure development in the country. However, cement demand, as projected, has not materialised, while capacity has been created.

This resulted in sector capacity utilisation declining to below 70%. The overall cement capacity utilization rate in India (excluding-South India) has been close to 80 to 85% in FY14. Some of the key reasons were the general slowdown in economy, political disruption in South India (specifically Andhra Pradesh), reduced government expenditure and non-availability of sand. The demand-supply mismatch is expected to stay for some more time; however a gradual recovery is expected over the coming years.

Cement demand growth has a strong correlation with GDP growth and with expected bottoming out of GDP there is high growth prospects for the cement industry in India. Going forward, incremental capacity addition is expected to be limited while the cement demand would improve resulting in higher capacity utilisation.

Demand growth revives with economic reforms: The outlook in the short term continues to remain challenging, demand growth in the long term is likely to be around 8% on the back of housing and infrastructure spends as outlined in the 12th five year plan (2012-17).The total investment in the infrastructure sector in the 12th Five year plan is estimated to be USD 1 Trillion.

Cement WPI ups

The Cement & Lime Wholesale Price Index (WPI), with a weight of 1.39 in the WPI, stood at 168.7 in October 2014, up by 2.6% over the year and up by 0.6% over the month. The average Cement & Lime WPI declined 1.6% in April-October 2014 over the year. The Cement & Lime WPI de-grew 1% in the fiscal ended March 2014 (FY 2014) compared with FY 2013.

Meanwhile, the Grey Cement WPI, with a weight of 1.26 in the WPI, stood at 168.1 in October 2014, up 2.5% over the year and up 0.5% over the month. The average Grey Cement WPI dropped 1.8% in April- October 2014 over a year ago. The Grey Cement WPI de-grew 1.3% in the fiscal ended March 2014 (FY 2014) compared with FY 2013.

Production drops

All-India cement production (proxy for demand) declined in October 2014, registering first fall in current fiscal. Domestic cement production, as reported by the Office of Economic Advisor, Ministry of Commerce and Industry, stood at 203.85 lakh tonnes in October 2014, down 1% from the corresponding previous month.

Cement Production Month FY15 FY14 FY13 FY12 Apr 23840 22353 21248 18890 May 23721 21822 21289 18450 Jun 22990 20244 19740 18020 Jul 22683 19478 19430 18830 Aug 20576 18656 17740 17670 Sep 21704 21028 18760 16480 Oct 20385 20598 20410 19110 Nov   18857 18091 18120 Dec   22283 22038 20130 Jan   23576 23238 21090 Feb   21945 21458 20810 Mar   24797 24788 22890 Apr-Oct 155899 144179 138617 127450 Apr-Mar   255637 248230 230490 Numbers in Th. tonnes

Cement production, however, increased 8.1% to 1558.99 lakh tonnes in April-October 2014. Cement production stood at 2556.33 lakh tonnes in FY2014, up 3% from 2482.30 lakh tonnes in FY2013.  

Q2 earnings zoom on demand recovery, delayed monsoon

The Indian cement sector saw earning acceleration in the quarter ended September 2014 (Q2) of the fiscal ending March 2015 (FY 2015), on the back of demand recovery, particularly in north/west India, and base effect (from a delayed monsoon this year).

Cement prices have been reasonably strong despite monsoon season (price fall this monsoon was less than normal). Price increases in south India, particularly Andhra Pradesh (AP), have sustained despite poor demand and opposition from builders.

Net profit of 37 major cement companies zoomed 124% to Rs 1479 crore on net sales gaining 15.7% to Rs 20340 crore, on the back of demand recovery, particularly in north and west India and base effect as monsoons were delayed this year

The operating profit margin (OPM) expanded 310 basis points (bps) to 14.8% due to reasonably strong prices pan-India despite monsoon season and price increases in south sustaining despite subdued demand in the region.

The OPM expansion helped operating profit growth enlarged to 46.8% at Rs 3006 crore. Other income (OI) increased 48% to Rs 700 crore. Further, modest interest cost and taxation expense led to the profit after tax (PAT) growing sharp 124% to Rs 1479 crore.

North Indian cement players (23 listed entities, accounting for 84% of the aggregate earning) PAT rising 55% to Rs 1041 crore on net sales gaining 18% to Rs 17176 crore. South Indian players (14 listed entities accounting for 16% of the aggregate earning) posted a net profit of Rs 438 crore, a turnaround from net loss of Rs 12 crore corresponding previous quarter, on net sales gaining 6% to Rs 3164 crore.

Lower overall input costs resulted in the OPM of south Indian players grew significant 600 bps to 18.2% while north Indian players OPM getting expanded 270 bps to 14.2%. Profit before interest, depreciation and tax (PBIDT) of south-based players grew sharp 144% to Rs 939 crore and north-based players PBIDT improved 30% to Rs 2766 crore.

Cement Sector Aggregates
Particulars	All India			North India			South India
	1409 (3)	1309 (3)	Var(%)	1409 (3)	1309 (3)	Var(%)	1409 (3)	1309 (3)	Var(%)
Sales	20340	17584	16	17176	14602	18	3164	2981	6
OPM	14.8	11.6		14.1	11.5		18.2	12.2
Operating Profit	3006	2048	47	2430	1685	44	576	363	59
Other Income	700	473	48	336	451	-26	363	22	1550
PBIDT	3706	2521	47	2766	2135	30	939	385	144
Interest	646	565	14	434	362	20	211	203	4
PBDT	3060	1956	56	2332	1774	32	728	182	300
Depreciation	1210	1098	10	1037	898	16	173	200	-14
Profit Before Tax	1850	858	116	1295	876	48	555	-18	LP
Tax	371	198	87	254	204	25	117	-6	LP
Net Profit	1479	660	124	1041	672	55	438	-12	LP
Figures in Rs crore. Source: Capitaline Databases
LP: Loss to Profit PL: Profit to Loss
No. of Companies: All India- 37,  North India-23, South India-14

Among top Indian companies, the revenue of India's biggest cement maker Ultratech grew 18% to Rs 5772.02 crore, due to contribution from recently acquired Gujarat (JPA) plant coupled with surge in cement demand and realization. The combined domestic cement and clinker sales increased 12.3% to 10.35 mt on demand increment and additional volume from 4.8 mt of capacity acquired units in Gujarat from Jaypee Cement Corp, while realization advanced 5.1% to Rs 5530 per tonne. The OPM escalated 120 bps to 16.3% amid decrease in variable and raw material costs. Further, with jump in interest cost and depreciation but drop in tax expenses and minority interest outgo, PAT inclined 48% to Rs 414.24 crore.

PAT of India's second largest cement maker ACC advanced 62% to Rs 192.60 crore on the back of 10% jump in the consolidated revenues to Rs 2815.01 crore. The topline grew on improvement in both sales volume and realization, meanwhile, bottom-line boosted as a result of customer excellence programme and better cost management, particularly with regard to distribution costs & optimized sourcing of inputs and improved realizations. The combined domestic cement sales increased 1.4% to 5.62 mt and realization jumped 7.9% to Rs 4879 per tonne. The OPM increased 230 bps to 13.5%, as a result, OP growth expanded 32% to Rs 379.08 crore.

Revenue of country's third largest cement maker Ambuja Cement grew 9% to Rs 2202.06 crore on improvement in sales realization. The combined domestic cement and clinker sales fell 1.1% to 4.67 million tonne but realization surged 10.4% to Rs 4684 per tonne. The OPM increased 450 bps to 17.9%, as a result, OP growth ballooned 46% to Rs 393.41 crore. PAT inclined 44% to Rs 239.06 crore.

PAT of the Ramco Cements spurted 391% to Rs 89.71 crore in spite of 3% jump in the revenues to Rs 951.43 crore, thanks to cost reduction and improved realisation. The sales realization grew 14.9% to Rs 4746 per tonne, but cement sales volume (including exports) dropped 11.4% to 1.943 mt. Operating expenses of the Company was down 7% to Rs 735.09 crore, as input and logistics costs declined during the period. As a result, OPM expanded 820 bps to 22.7%.

CCI closes cement case- The Competition Commission of India (CCI) has closed a case of alleged cartelisation among cement companies due to a lack of evidence. An anonymous reference before the CCI had alleged that 11 cement companies increased prices by Rs 75/bag (US$1.21/bag) within a month. In its order, the CCI noted that the reference states that the price increased from Rs 230-250 to Rs 300-330/bag after the general elections in Andhra Pradesh. The order didn't specify the exact period over which the price rise took place. However, since the reference provided no documentary evidence in support of its allegations, the CCI ruled not to order an investigation.

Outlook

The Indian cement sector reported an better than expected results in the quarter ended September 2014 (Q2) of the fiscal ending March 2015 (FY 2015), on the back of demand recovery, particularly in north/west India, and base effect (from a delayed monsoon this year). Cement prices have been reasonably strong despite monsoon season (price fall this monsoon was less than normal).

The industry profitability improvement is expected to continue going forward, driven by demand recovery and, thus, better capacity utilizations. The industry expects incrementally better volume off-take in FY 2015 and FY 2016, with long-term demand likely to grow at 7-8% CAGR given the cyclical upturn in the economy and the expected policy push to drive investments in the infrastructure sector by the new pro-development government at the Centre. The industry is also likely to get boost from demand for smart cities project.

The latest report by CII and AT Kearney titled "Cement Vision 2025: Scaling New Heights", says the residential and commercial construction will continue to spur cement demand. The cement industry real boost is expected to come from an increase in the pace of infrastructure creation over the next 10 years. As per CII report mentioned above, an infrastructure investment of between 9-12% of GDP will be required to enable sustained economic growth in India.