Key Sector Data Market Cap (Rs Crore) 316518 Market Cap (USD million) 49045 P/E        40.9 P/BV          3.7 Debt/Equity          0.4 ROA (%)          5.8 ROE (%)          9.0 EV/Sales          3.3 EV/EBITDA        16.3

CEMENT
Period	Sales % Chg YoY	Operating Profit % Chg YoY	PBIDT % Chg YoY	Adjusted PAT % Chg YoY	OPM (%)	PBIDT Margin (%)	PBT Margin (%)	PAT Margin (%)
201603	18.0	22.8	24.6	9.8	18.2	20.3	10.3	7.2
201606	16.1	51.4	50.5	95.1	20.1	21.9	13.0	8.9
201609	10.9	29.1	27.9	36.9	17.5	19.9	8.8	6.2
201612	12.1	12.0	10.8	20.7	15.6	17.2	6.6	5.3
201703	-7.5	-18.5	-17.1	-1.2	15.9	18.2	9.9	7.7
2013-14	-0.2	-22.9	-20.5	-30.4	15.1	17.4	8.7	7.3
2014-15	11.6	17.2	17.7	17.8	15.9	18.3	9.8	7.7
2015-16	7.9	12.1	12.3	4.2	16.5	19.1	9.1	7.4
2016-17	9.2	15.5	13.5	9.1	17.4	19.8	10.3	7.4

Good monsoon, infrastructure, and housing projects to be triggers for outperformance

The Indian cement sector's earnings grew at a muted pace in Q4 of the fiscal ended March 2017 (FY2017), due to temporary slowdown of economic activities caused by the demonetisation measures taken by the government. The demonetisation move led to a cash crunch situation resulting in deferment of private consumption for a short while which impacted the growth for cement in the last quarter of FY2017. Also, the sector's performance was affected by delay in execution of projects, slow construction activity, and surplus inventory in urban real estate.

India's Gross Domestic Product (GDP) rose at moderated pace of 6.1% in Q4 of FY2017, which is the lowest pace of growth in last nine quarters. The GDP growth decelerated sharply from 7% growth recorded in the preceding last quarter and 8.7% surge posted in the corresponding quarter last year. Another measure of economic activity - Gross Value Added (GVA) grew at slower pace in last 12 quarters at 5.6% in Q4 of FY2017 compared with 6.7% in Q3 of FY2017 and 8.7% in Q4 of FY2016.

Domestic cement production (proxy for demand), as reported by the Office of Economic Advisor, the Ministry of Commerce and Industry, dropped 11.9% to 69 million tonnes (mt) in the March 2017 quarter over a year. The double-digit volume deceleration was due to the dual headwinds of weak post-demonetisation demand and the previous year's higher base. Industry volumes grew 11.8% in Q4 of FY 2016.

The all-India average cement price was subdued in Q4 of FY 2017 over corresponding previous quarter due to the headwinds of weak post-demonetisation demand. The average cement prices appreciated by ~8% in North and Central belts while cement prices declined by ~1% in other regions.

Net profit of 33 major cement companies increased marginally 1% to Rs 1815 crore on net sales growth of 6% to Rs 24580 crore in Q4 of FY 2017 over Q4 of FY 2016. The operating profit margins (OPM) reduced 180 basis points (bps) to 15.4% due to due to increased input costs. As a percentage of sales, freight costs, power and fuel costs, other expenses, and employee benefit costs increased. With drop in other income (OI), incline in interest cost, and fall in depreciation as well as rise in taxation outgo pressured net profit growth at 1% to Rs 1815 crore.

Cement Sector Aggregates
Particulars	All India			North India			South India
	201703 (3)	201603 (3)	%Var	201703 (3)	201603 (3)	%Var	201703 (3)	201603 (3)	%Var
Sales	24580	23127	6	20325	19390	5	4254	3737	14
OPM	15.4	17.3		15.2	16.8		16.4	19.9
Operating Profit	3794	3994	-5	3098	3251	-5	696	743	-6
Other Income	592	626	-5	559	541	3	33	85	-61
PBIDT	4386	4620	-5	3657	3792	-4	729	828	-12
Interest	777	763	2	595	555	7	181	208	-13
PBDT	3609	3857	-6	3062	3237	-5	548	620	-12
Depreciation	1197	1462	-18	982	1232	-20	215	230	-7
Profit Before Tax	2412	2395	1	2080	2005	4	333	390	-15
Tax	597	593	1	528	510	4	70	84	-17
Net Profit	1815	1802	1	1552	1495	4	263	306	-14
Figures in Rs crore. No. of Companies: All India- 33,  North India-18, South India-15
LP: Loss to Profit PL: Profit to Loss
Source: Capitaline Databases

Net profit of north Indian cement players (18 listed entities, accounting for 86% of the aggregate profit) inclined 4% to Rs 1552 crore on the back of 5% growth in net sales to Rs 20325 crore. South Indian players (15 listed entities accounting for 14% of the aggregate profit) posted a 14% drop in net profit to Rs 263 crore despite net sales gaining 14% to Rs 4254 crore, due to higher interest cost, depreciation, and tax expense.

The weak realization and muted cement sales volume growth resulted in the OPM of south Indian players declining 350 bps to 16.4% and north Indian players' OPM dipping 150 bps to 15.2% over the year. With addition in OI, profit before interest and depreciation and tax of south based players decreased 12% to Rs 729 crore, while that of north-based players fell 4%to Rs 3657 crore.

Among the top Indian companies, revenues of India's biggest cement maker Ultratech were up 3% to Rs 7923.96 crore due to improved realization. The combined domestic cement and clinker sales volume increased marginally 0.2% to 13.35 million tonnes (mt), meanwhile realization grew 2.7% to Rs 5258 per tonne. The OPM declined 220bps to 16.9%. Thus, OP dropped 9% to Rs 1336.07 crore. The rise in OI but also jump in interest costs and tax outgo pressured net profit to slide 11% at Rs 725.90 crore.

The south-based Ramco Cements posted 26% drop in net profit to Rs 134.47 crore inspite of 6% gain in revenues to Rs 1190.01 crore. Cement sales volume (including exports) inclined 10.6% to 22.48 lakh tonne, but cement sales realization fell 4.6% to Rs 5236 per tonne. OPM reduced by 680 bps to 21.2%, thus, the OP shed 19% to Rs 252.54 crore.

GST, monsoon to ensure cement prices remain subdued in near term

The all-India average cement prices softened in May 2017 sequentially previous month after registering ~7% gain in April 2017 and ~4% rise in March 2017. The cement price slackness in May 2017 was due to tapering demand as many consumers deferred their purchases primarily on account of higher cement prices and sand and labour shortage in many places. 

Going ahead, incoming monsoon, labour shortage and the prevalent ambiguity around the Goods and Services Tax (GST) are poised to keep cement prices subdued in the coming months. The demand for cement is likely to go down as construction activity will take a brief pause in the monsoon which will coincide with the GST rollout. In turn, this will affect cement sales volume and thus its prices. However, post-monsoon, the affordable housing segment and the government's push for infrastructure development will drive cement sales. 

Cement Industry Scenario

The Indian Cement Industry with an installed capacity of ~372 million tonnes per annum witnessed acceleration in cement demand growth in FY 2016-17 on the back of the Seventh Pay Commission pay hike, and various other policy initiatives announced by the government.

The government has been striving to improve India's competitiveness across segments, by introducing schemes like - Smart City, AMRUT, Housing for All, etc., which will make cities environmentally and economically viable.

The government has provided incentives for rural development and also allowed 100% FDI in the construction development and industrial parks. Overall, cement demand is expected to further grow in the in FY 2017-18 on account of higher government spending on various initiatives as announced in the Union Budget along with incentives for affordable housing by providing it with ‘Infrastructure Status'. This is likely to boost the demand for cement by a positive multiplier.

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 (13%), commercial construction (11%) and industrial construction (9%).

With the infrastructure sector enjoying top priority status under the Narendra Modi-led government at the Centre, the cement industry is poised to witness robust growth in the coming years. According to estimates, India will need as much as 550-600 million tonnes of cement by 2025 to keep up with the various ambitious infrastructure-building targets set by the government. The key drivers for the rise in demand for cement are the affordable housing sector, infrastructure growth such as the dedicated freight corridors, airports and ports, commercial real estate growth, smart cities, Swachh Bharat scheme, development of metro rail in key metropolitan cities in Mumbai, Bengaluru and Hyderabad, and the rapid urbanisation of the present Indian cities.

Cement WPI for April

The cement, lime and plaster Wholesale Price Index (WPI), with a weight of 1.644 in the WPI, inclined 0.6% to 109.5 in April 2017 over a year and up 0.2% over March 2017. The cement, lime and plaster WPI grew 0.6% in FY2017 as against the 0.9% decline in FY2016.

Meanwhile, the Ordinary Portland cement WPI, with a weight of 0.852 in the WPI, grew 0.8% at 107.1 in April 2017 over the year and up 0.4% over the month. The Ordinary Portland cement WPI grew 0.8% in the FY2017 compared with the 2.8% drop over a year ago period.

All-India cement production (proxy for demand), as reported by the Office of Economic Advisor, Ministry of Commerce and Industry, decreased 3.7% to 237.73 lakh tonnes in April 2017 over a year and down by 5.7% over March 2017.

Cement Production Month FY17 FY16 FY15 Apr 24692 23656 23984 May 24887 24293 23654 Jun 26064 23620 22963 Jul 23330 23008 22697 Aug 22283 21619 20514 Sep 22627 21440 21798 Oct 24262 22837 20355 Nov 20516 20405 20755 Dec 22001 24109 23151 Jan 22489 25926 23738 Feb 21454 25494 22462 Mar 25208 27050 23967 Apr-Mar 279813 283457 270038 Apr-Mar 279813 283457 270038 Numbers in Th. tonnes

Cement production declined 1.2% to 2799.75lakh tonnes in the FY 2017 compared with the 4.6% incline to 2834.57 lakh tonnes in FY2016.

Impact of the peak GST rate offset by lower key inputs rates

The government has announced the Goods and Services Tax (GST) rates mid-May 2017. Around 22-25% was the existing indirect tax incidence on cement. The GST tax rate for cement is fixed at 28%.

On the brighter side, the GST Council has maintained a lower rate of 5% on key inputs like limestone, sand, gypsum and iron ore, which could support cement manufacturers to maintain procurement cost, which may be favourable by virtue of anti-profiteering clause. Also, lower tax on transport sector could benefit cement companies with lower freight costs, going forward.

There would be no major change in the prices of cement, and on the contrary, the cement prices may remain stable against an expectation of hike in prices due to GST as lower tax on coal is expected to cushion the impact of the peak rate.

Outlook

The Central government's continued focus on infrastructure development, affordable housing, smart cities, concrete roads and highways coupled with remonetisation and the structural reforms such as GST is expected to boost demand post monsoon-related sluggishness. Incremental cost pressures have subsided but price realizations growth can be volatile and patchy.

With the GST slated to be implemented in July 2017, the cement sector at 28% GST slab as against around 22-25% the existing indirect tax incidence. On the brighter side, the GST Council has maintained a lower rate of 5% on key inputs like limestone, sand, gypsum and iron ore, which could support cement manufacturers to maintain procurement cost, which may be favourable by virtue of anti-profiteering clause. Also, lower tax on transport sector could benefit cement companies with lower freight costs, going forward.

With the forecast of normal rains in the Monsoons and increased domestic consumption and higher capacity utilisation, the private Investment cycle is expected to rebound during the year. As in previous years, Union Budget for FY 2018 has its thrust on raising public investment, infrastructure and affordable housing which has been accorded infrastructure status. This along with the projected favourable economic environment is expected to increase the demand for cement and result in higher capacity utilisation. Also, with several legislations being put in place to promote recovery and growth like Housing for all by 2022, Smart-cities, broadening the financial inclusion and with the passage of GST, it is expected that the overall cement demand outlook in the country remain positive for the medium to long term.