Cement price hike: Wait, it doesn't signal return of pricing power

NEW DELHI: The recent hike in cement prices amid rising demand has made investors take a relook at the sector, which has gone through a rough patch in the recent past. Many brokerages and independent analysts say the price hike will help improve margins and increase profitability of cement manufacturers over the next two years. “The recent hike in cement prices will boost operating profit of cement firms at a time when costs are falling and demand is rising,” said a Crisil report. Cement prices rose by Rs 24-25 per 50kg bag in February. The southern region saw the steepest hike, with Hyderabad recording a Rs 77 rise per bag, followed by Rs 62 per bag in Chennai and Rs 52 per bag in Bengaluru. 68298622 So has the pricing power returned to this sector?Analysts are not sure. “Pricing power will come only when capacity utilisation improves,” says Jiten Parmar, Co-founder of Aurum Capital. “Currently the capacity utilisation is around 78 per cent. When it crosses 82 per cent, the sector will have pricing power,” he said. Excess capacity has been a major challenge for the sector despite the increased government spending on the construction and infrastructure sectors. Government policies and measures remain key monitorables in the near term. Cement production increased 11 per cent year-on-year (YoY) in January 2019 — reaching the highest production level ever — despite a high volume base last year. The production growth from April 2018 to January 2019 stood at 13.6 per cent year on year. In most regions, production increased amid slowing demand.Uncertainty on the sustainability of the price rise is another factor to keep an eye on. “Prices may come down in the southern region because of overcapacity,” Parmar said. Finding the core of the sector's trend is difficult as the market for this sector is highly region-specific. “Different regions can behave differently. So even though the overall picture looks promising, we need to adjust our views region wise,” Parmar said. Analysts advise looking at the northern region at this juncture. “We prefer companies with higher exposure to the northern region, as North is expected to witness the maximum improvement in capacity utilisation," said Motilal Oswal Securities. The brokerage’s top picks from the cement space are all plays the ‘North’ theme such as Shree Cement and JK Cement. It also likes ACC, which the brokerage says is on a growth capex mode and should witness improvement in profitability. 67894618 67793659

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