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New UserNote ban to delay recovery in cement demand by a year
27 Dec 2016
Cement demand is unlikely to recover for another year due to demonetisation and
increase in prices of diesel and pet coke that has put cost pressure on most cement makers.
Stocks of cement companies have fallen 1030% since November 8, the day Prime Minister
Narendra Modi announced the decision to withdraw Rs 500 and Rs 1,000 as legal tender.
Even so, cement stocks remain expensive, both in the historical context and in absolute terms,
according to analysts, who predicted that these stocks will see derating in the coming weeks.
“Cement sector valuations were pricing in a strong recovery preNovember 8, when
demonetisation was announced. Despite recent correction, they still trade at 1015 times 1
year forward EV/EBITDA, once the impact of lower demand is baked in,” said Ankur
Kulshrestha, analyst, HDFC Securities. “We expect cement multiples to derate further and
suspect some more downside as Q3 FY17 will represent the confluence of negatives as both
volumes and costs get hit.”
Stocks of bigger cement firms such as Ambuja, UltraTech, ACC and Shree Cement are currently trading at 1618 times their 201617
forward EV/EBITDA. Housing and construction are the sectors most impacted by demonetisation.
As per a recent JM Financial survey, cement volumes are down across markets. The northern and western regions witnessed a 2550 per
cent fall in sales. Some southern regions have experienced a decline in the first week of December. The eastern region saw a 70 per cent
demand decline in November, but demand recovered in the subsequent period to about 70 per cent of the usual levels. Surveys indicated
that companies have announced Rs 1025 per bag price cuts in the northern and western regions. While investors expect things to
normalise in three to six months, the impact is enough to postpone the recovery in cement demand by another year or so, according to
analysts.
“We expect demonetisation to have material impact on second half of FY17 earnings of cement companies,” said Abhishek Anand,
analyst, JM Financial. “We expect a decline of 510 per cent in volume for second half of FY17 and reduce our growth expectation for
FY18, as we factor in delayed recovery.”
Stocks of companies such as JK Lakshmi, JK Cement, Orient Cement and India Cement have crashed nearly 30 per cent since November
8, while those of UltraTech, Shree Cement and Ambuja Cement shares have declined nearly 20 per cent.
“We believe that it is too early to quantify the impact of decline in cement demand growth for the full year FY17 but second half of FY17 is
likely to witness a sharp yearonyear decline” said Teena Virmani, analyst, Kotak Securities. “We, however, expect rural demand to
normalise once new currency circulation improves while infrastructureled demand is likely to improve with higher liquidity with the
government.”
SOurce:Economic Times