Cement

Sector Update
January 16, 2019
Price recovery absent; Valuation de-rating likely
We maintain our Underweight stance on Cement Sector as stretched
valuations overlook the weak earnings outlook. Street is negatively surprised
Sensex v/s PL Cement Index with the muted prices in a scenario of firm demand. However, we do not
expect meaningful increase in prices due to intense competition in non-trade
PL Cement Index Sensex
120 segment and weak demand in Trade segment. We have been strongly

110
pushing this argument for last one year. Recent bids at low price levels in
non-trade vindicates our rationale of high competition intensity despite peak
100
period of construction activity.
90
80 Market is structurally shifting towards institutional/non-trade segment due to
70 sharp rise in Govt spending and sluggishness in trade demand because of
May-18
Jan-18

Jun-18

Jan-19
Mar-18
Feb-18

Apr-18

Jul-18

Oct-18
Aug-18
Sep-18

Nov-18
Dec-18

weak consumer sentiments. Trade demand is unlikely to revive in medium

term due to deep-rooted impact of demonetization, depressed labor market
Source: Bloomberg and uninspiring business sentiments. Impinged by commodity nature of Non-
trade segment, overcapacity and missing pick-up in trade segment, prices
Stock Performance would remain under pressure for next couple of years. Over-optimistic
1M 6M 12M estimates and poor quality of earnings would accentuate inevitable valuation
Sensex 1.1 0.1 4.6 de-rating and earnings downgrade risk for the sector. We maintain our
PL Cement Index (3.7) 1.9 (17.8) Underweight stance on the sector.
ACC (0.6) 17.5 (19.5)
Ambuja Cement (1.1) 13.9 (21.9)  Cost cuts would not help earnings: Fall in pet coke prices (down 8-9% QoQ)
Heidelberg Cement (5.1) 10.6 (13.5) and diesel prices (down 10% QoQ) would ease cost pressure for the sector.
JK Lakshmi Cement 10.0 (7.0) (31.3) However, given the stiff competition in the non-trade segment (having
Shree Cement (6.7) (3.5) (17.5) commodity nature), we strongly believe that majority of the reduction would be
The Ramco Cement 0.3 (1.1) (19.7) passed on.
UltraTech Cement (4.0) (0.5) (15.4)
Source: Bloomberg  New capacities would continue to aggravate oversupply: Based on our
estimate, ~55mn tons of new capacities would be commissioned in next couple
of years. This would not allow capacity utilization rates to cross 80% mark.
Surplus supply and high share of non-trade demand would keep pricing under
pressure for next couple of years.

 Limited price hike, significantly lower than historical rise: Market

absorbed hike of Rs2-5/bag in Norther region, below the announcement of
Rs7-10. Efforts to hike prices failed to succeed in rest of regions due to poor
discipline, volumes pressure in non-trade and risk of leakage of trade volumes
to non-trade.

Cement Valuation metrics

P/E (x) EV/EBITDA (x)
Company Rating CMP (Rs) TP (Rs)
FY20E FY21E FY20E FY21E
ACC BUY 1,483 1,710 21.4 20.8 11.9 11.3
Ambuja Hold 217 220 23.0 21.2 9.1 8.3
Kamlesh Bagmar Heidelberg BUY 150 190 15.0 14.8 7.2 6.7
kamleshbagmar@plindia.com | 91-22-66322237 JK Lakshmi Hold 308 340 24.0 19.1 9.8 8.6

Amit Khimesra Shree cem Hold 15,619 16,500 34.1 28.8 17.6 15.3
amitkhimesra@plindia.com | 91-22-66322244 Ramco cem Hold 631 660 23.6 21.0 14.7 12.6
Ultratech Hold 3,828 4,040 33.5 27.8 16.2 14.5
Source: Company Data, PL Research (All prices as on January 15, 2019)

January 16, 2019 1

 Cement

 North-Sluggish demand hurts price recovery: Dealers sounded anxious

due to lack of pricing discipline among the cement manufacturers. Prices
further fell by Rs3/bag MoM in January. We expect prices to improve marginally
by Rs10-12/bag in the quarter (despite peak season) as the players are not
aggressive on prices compared to other regions.

 Central- Prices remained muted in Jan’19: Prices in UP and MP remained

flat in Jan’19 MoM despite steep cuts in last quarter. The improvement in UP
prices would depend on price trends in Northern region as wide differential
motivated Northern players to dump material in last quarter. Given the high
base, we expect least improvement in prices among the regions.

 South- Race to dump volumes at cost of low prices: As the majority of

demand is emanating from Non-trade segment in the region, there is cutthroat
competition to exploit highly price sensitive demand. We do not expect much
improvement in prices due to capacity addition and intense competition.

 West- Maharashtra extends the lean patch, Gujarat stable: Companies

tried to increase prices in Maharashtra but poor response led to roll back of
prices. Maharashtra’s average prices fell Rs3/bag MoM in January while prices
remained stable MoM in Gujarat.

 East- Strong on demand, weak on price front: Except West Bengal (WB),
Prices in rest of states remained stable on steep cut in prior quarter. Prices in
WB fell by Rs10/bag MoM in January due to high inventory (due to strong
volumes push). Prices are expected to remain under pressure due to addition
of grinding capacities and intense competition.

Valuation Summary
EBITDA EV/EBITDA
CMP TP PAT (Rs m) P/E (x) P/B (x) EV/t (USD)
Company Rating (Rs m) (x)
(Rs) (Rs)
FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
ACC BUY 1,483 1,710 20,256 21,609 13,026 13,384 21.4 20.8 2.6 2.5 11.9 11.3 106 107
Ambuja cement Hold 217 220 39,489 43,199 18,736 20,283 23.0 21.2 1.9 1.8 9.1 8.3 119 333
Heidelberg Cement BUY 150 190 4,527 4,452 2,253 2,290 15.0 14.8 2.5 2.3 7.2 6.7 82 72
JK Lakshmi Cement Hold 308 340 4,856 5,171 1,511 1,894 24.0 19.1 2.2 2.0 9.8 8.6 57 54
Shree Cement Hold 15,619 16,500 30,408 33,829 15,946 18,884 34.1 28.8 4.8 4.2 17.6 15.3 182 163
The Ramco Cement Hold 631 660 11,292 12,978 6,303 7,075 23.6 21.0 3.0 2.6 14.7 12.6 110 108
Ultratech Cement Hold 3,828 4,040 81,242 88,236 33,006 39,752 33.5 27.8 3.0 2.7 16.2 14.5 154 150
Source: Company Data, PL Research (All prices as on January 15, 2019)

January 19, 2019 2

 (Rs / Bag) (Rs / Bag)

300
310

280
290
320

275
285
295
305
315
325
Jul-16 Jul-17

Source: PL
Source: PL
Sep-16 Aug-17

Delhi
Sep-17
Nov-16

Rohtak

January 19, 2019

Oct-17
Jan-17 Nov-17
Mar-17 Dec-17
May-17 Jan-18
Jul-17 Feb-18
Mar-18
Sep-17
Apr-18
Nov-17 May-18
Jan-18 Jun-18
Mar-18 Jul-18
Aug-18
May-18
Sep-18
Jul-18
Oct-18
Sep-18 Nov-18
Nov-18 Dec-18
Jan-19 Jan-19

(Rs / Bag) (Rs / Bag)

280
290
300

270
310
320
330
260
280
300

240
250
270
290
310

Jul-16 Jul-16

Source: PL
Source: PL

Sep-16 Sep-16
Nov-16 Nov-16
Jaipur
North: Region’s average price fell by Rs3/bag MoM

Bhatinda

Jan-17 Jan-17
Mar-17 Mar-17
May-17 May-17
Jul-17 Jul-17
Sep-17 Sep-17

Nov-17 Nov-17

Jan-18 Jan-18
Mar-18
Mar-18
May-18
May-18
Jul-18
Jul-18
Sep-18
Sep-18
Nov-18
Nov-18
Jan-19
Jan-19
Cement

3
 (Rs / Bag)
(Rs / Bag)

300
310
320
330
340

Source:
320
330

280
290
300
310
340
350
Jul-16

Source: PL
Jul-16
Sep-16
Sep-16
Nov-16

January 19, 2019

Bareilly
Nov-16

Meerut
Jan-17
Jan-17
Mar-17
Mar-17
May-17
May-17
Jul-17
Jul-17
Sep-17
Sep-17
Nov-17
Nov-17
Jan-18
Jan-18
Mar-18
Mar-18
May-18
May-18
Jul-18
Jul-18
Sep-18
Sep-18
Nov-18
Nov-18
Jan-19
Jan-19
Central: Prices flat MoM on a weak base

(Rs / Bag) (Rs / Bag)

280
290
300
310
320
330

280
310
330
360

290
300
320
340
350
370

Source:
Jul-16 Jul-16
Source: PL

Sep-16 Sep-16
Nov-16 Nov-16
Bhopal

Kanpur

Jan-17 Jan-17
Mar-17 Mar-17
May-17 May-17
Jul-17 Jul-17
Sep-17 Sep-17
Nov-17 Nov-17
Jan-18 Jan-18
Mar-18 Mar-18
May-18 May-18
Jul-18 Jul-18
Sep-18 Sep-18
Nov-18 Nov-18
Jan-19 Jan-19
Cement

4
 (Rs / Bag) (Rs / Bag)

350
360
370

300
310
320
330
340
380
390
400

310
350
390
430

290
330
370
410
Jul-16

Source: PL
Source: PL
Jul-16
Sep-16 Sep-16
Nov-16 Nov-16

January 19, 2019

Jan-17 Jan-17 Chennai

Bengaluru
Mar-17 Mar-17
May-17 May-17
Jul-17 Jul-17
Sep-17 Sep-17
Nov-17 Nov-17
Jan-18 Jan-18
Mar-18 Mar-18
May-18 May-18
Jul-18 Jul-18
Sep-18 Sep-18
Nov-18 Nov-18
Jan-19 Jan-19

(Rs / Bag) (Rs / Bag)

270
330

250
290
310
350

340
350
360
370
380
390
400
410
Jul-16 Jul-16

Source: PL
Source: PL

Sep-16 Sep-16
Nov-16 Nov-16
Jan-17 Jan-17
Hyderabad

Mar-17
Trivandrum

Mar-17
South: Intense competition kept prices under pressure

May-17 May-17
Jul-17 Jul-17
Sep-17 Sep-17
Nov-17 Nov-17
Jan-18 Jan-18
Mar-18 Mar-18
May-18 May-18
Jul-18 Jul-18
Sep-18 Sep-18
Nov-18 Nov-18
Jan-19 Jan-19
Cement

5
 (Rs / Bag) (Rs / Bag)

300
310
340

290
320
330
350
360

290
300
310
320
330
340

270
280
Jul-16 Jul-16

Source: PL
Source: PL
Sep-16 Sep-16
Nov-16 Nov-16

January 19, 2019

Kolkata
Jan-17 Jan-17
Mar-17 Mar-17

Bhubaneswar
May-17 May-17
Jul-17 Jul-17
Sep-17 Sep-17
Nov-17 Nov-17
Jan-18 Jan-18
Mar-18 Mar-18
May-18 May-18
Jul-18 Jul-18
Sep-18 Sep-18
Nov-18 Nov-18
Jan-19 Jan-19

(Rs / Bag)
300
310
320
330
340
350
360
East: Strong on demand, weak on price front

Jul-16
Source: PL

Sep-16
Nov-16
Patna

Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Nov-18
Jan-19
Cement

6
 (Rs / Bag) (Rs / Bag)

290
320
365

260
275
305
335
350
380

220
260
320
360

240
280
300
340
Jul-16 Jul-16

Source: PL
Source: PL
Sep-16 Sep-16
Nov-16 Nov-16

Pune

January 19, 2019

Mumbai
Jan-17 Jan-17
Mar-17 Mar-17
May-17 May-17
Jul-17 Jul-17
Sep-17 Sep-17
Nov-17 Nov-17
Jan-18 Jan-18
Mar-18 Mar-18
May-18 May-18
Jul-18 Jul-18
Sep-18 Sep-18
Nov-18 Nov-18
Jan-19 Jan-19

(Rs / Bag) (Rs / Bag)

290

230
250
270
310
330
280

220
235
250
265
295
310
325

Jul-16 Jul-16

Source: PL
Source: PL

Sep-16 Sep-16
Nov-16 Nov-16
Jan-17 Jan-17
Vadodara

Mar-17 Mar-17
Ahmedabad

May-17 May-17
West: Maharashtra extends the lean patch, Gujarat stable

Jul-17 Jul-17
Sep-17 Sep-17
Nov-17 Nov-17
Jan-18 Jan-18
Mar-18 Mar-18
May-18 May-18
Jul-18 Jul-18
Sep-18 Sep-18
Nov-18 Nov-18
Jan-19 Jan-19
Cement

7
 Cement
Analyst Coverage Universe
Sr. No. CompanyName Rating TP (Rs) Share Price (Rs)

1 ACC BUY 1,710 1,478

2 Ambuja Cement Hold 220 218

3 Coal India Hold 262 235

4 Heidelberg Cement India BUY 200 150

5 Hindalco Industries Accumulate 280 209

6 Hindustan Zinc Accumulate 312 275

7 Jindal Steel & Power BUY 239 152

8 JK Lakshmi Cement Hold 340 315

9 JSW Steel BUY 360 290

10 NMDC Reduce 86 95

11 Shree Cement Hold 17,500 16,900

12 Steel Authority of India Hold 50 53

13 Tata Steel BUY 785 486

14 The Ramco Cements Hold 660 629

15 Ultratech Cement Hold 4,040 3,927

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly

January 19, 2019 8

 Cement

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January 19, 2019 AMNISH AGGARWAL

Digitally signed by AMNISH AGGARWAL
DN: c=IN, o=Prabhudas Lilladher Private Limited, ou=organisation, cn=AMNISH AGGARWAL,
serialNumber=7a6f13691881d5a8af6353865a61b48b7040e72f4a1bf53182e368b3ca14a5e4, postalCode=400015,
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Date: 2019.01.16 09:27:06 +05'30'
9