India Cements Share Price: Morgan Stanley highlights what’s keeping this cement stock weak?

India Cements Share Price: Contrary to general expectations of an all round price hike post festive season, prices have corrected marginally in Nov20 (MoM) despite stable volumes. We think there is a window of opportunity (Dec-20 to Mar-21) for cement producers to take price hikes assuming volumes remain strong.

Volumes are holding up well:

Morgan Stanley estimates November-20 to be a stable month YoY while October + November combined should be double digit growth. As per DIPP data Oct cement production grew 2.5% YoY. Morgan Stanley notes that DIPP data continues to show divergence with trends reported by listed companies in Q2 FY21 and this continued in Oct. Channel checks indicate strong double digit growth in Oct, stable to marginal growth in Nov, thereby taking October + November to mid single digit to double digit growth YoY for larger companies under our coverage universe. South and West remained as laggards relative to other regions in November.

Cement prices have been weak vs expectations of an increase:

Across regions cement prices were either stable month on month or corrected slightly. Central was stable while North/West saw correction in the range of Rs 2-5/bag while prices were weaker in South/East (down by Rs 5-10/bag). At an all India level (simple average of all regions), cement prices would be down by 1-1.5% on MoM basis. Assuming current prices continue, the Dec 20 quarter could see realization weakness of 1-2.5% QoQ across our coverage universe (lowest for Shree / Ultratech and highest for Dalmia Bharat).

Cement producers have a window of opportunity over the next 4 months to take price hikes:

Contrary to historical trends, Morgan Stanley believes December will be a stable month for cement pricing with possibility of some hikes. Industry's focus is firm on profitability and Morgan Stanley believes cement producers have a window of opportunity to take reasonable price hikes during Dec-20 to Mar-21 as volume trends are strong. Unlike 2020, Morgan Stanley will see large new capacity additions getting bunched up in 2021 so price hikes in the early part of the year will be even more critical for a stable to positive realization in full year.

Cover the inflation in input costs:

International petcoke prices have risen by a further US $10/t vs end-October 2020 prices and are higher by almost US $18-20 vs average of Sep-20 quarter while the International coal prices on the other hand increased by only US $4/t vs Oct and US $8/t vs Sep-20 quarter.

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Morgan Stanley thinks variable cost headwind will partly get mitigated due to:

a) fuel mix shifting to lower cost coal vs petcoke
b)      lower diesel prices (-7% vs Sep-20 quarter)
c)       Potential price hikes covering inflation in input costs