Cement Sector 27 February 2018

Channel Check Cement Sector 27 February 2018 Demand Displays A Mixed Trend; Prices Flat MoM All-India retail cement prices remained flat at Rs311/bag MoM (Rs309/bag in January 2018). However, prices rose ~5% YoY. The prices indicate a mixed trend with the central region showing weakness, western region witnessing a rise and other regions staying flat MoM. YTD cement demand in FY18 during nine months ended December 2017 was flat (1.0% up) at 217mt. However, MoM growth was 8.4% in December 2017, while because of a weak base YoY growth was robust at 19.6%. Our channel check indicates demand gaining momentum in certain pockets, but except for selected regions the overall picture shows limited activity because of various reasons. Demand pick-up is dominantly from the government-led infrastructure segment while the organised real estate sector still remains listless. According to our channel check (sample size of ~ 22 cement dealers across India), feedback from the twin states of Telangana and Andhra Pradesh showed signs of robust demand (conversion of announced projects into final execution), demand in Gujarat picking up in the pre-festive (Holi) season and secular demand growth in Chhattisgarh (though tepid over the previous months). However, the contribution from rural areas (individual house builders or IHB) and the traditional 4Q project completion rush was lacking in February 2018, which came as a surprise. Certain pockets in North India (Punjab and Himachal Pradesh) are reeling under supply pressure following the ramp-up of newly acquired assets of JP Associates by UltraTech Cement. Feedback from our Mumbai channels indicates a temporary shortage of OPC cement amid higher demand, although with supply picking up this gap will be bridged. The feedback indicates that retail segment demand continues to be extremely weak. The widening price gap between trade and non-trade segments essentially indicates demand prevailing in the project segment, but demand weakening in the retail segment. We continue to prefer JK Cement as a play on the niche white cement business and The Ramco Cements. Prices pick up in western region, mainly in Gujarat: The state showed improvement with prices in Ahmedabad (Rs315/bag versus Rs310/bag MoM) and Surat staying firm at a higher level (Rs316/bag unchanged vs. January 2018). This was largely driven by pre-festive (Holi in early March) demand. However, lack of availability of labour in the festive season will keep construction activity weak and prices are likely to be under pressure in these pockets. In Nashik, non-trade prices were under pressure hovering between Rs225-Rs235/bag. Demand is expected to pick up in central and south Maharashtra because of irrigation-related projects announced by the government, but equally strong supply is expected from Karnataka which is expected to keep the prices under pressure. Prices in central and eastern regions soften: Cement prices in eastern region remained flat (average Rs315/bag unchanged MoM) but were under pressure because of limited construction activity. Though Chhattisgarh continued to witness healthy demand, the lack of fund disbursement impacted the momentum. The non-trade segment reeled under pressure at Rs205/bag. Weakness continues in Bihar because of structural problems. However, Kolkata witnessed supply shortage on lack of rake availability to transport clinker to grinding units near the city, leading to a price rise of Rs5/bag MoM (Rs350/bag in the retail segment). Emami and JSW continue to tap markets in West Bengal. Prices stay flat in southern region, but structural shift visible: Cement prices in southern region showed a mixed trend with prices in Tamil Nadu weakening, but the pick-up in demand was strong following the availability of sand. Prices in the retail segment gained in Telangana and Andhra Pradesh (Rs310/bag versus Rs280/bag). Strong momentum was witnessed in the project (non-trade) segment and prices in this segment stayed unchanged at Rs240/bag. Prices in Kerala remained flat as supply from Gujarat (through the sea route) kept manufacturers in the southern region on the edge. Sporadic sales of a few brands from Pakistan were witnessed during the month. Pricing in northern region improves only marginally: Demand was strong in the northern region, although largely related to the typical 4Q completion work. Additional new tenders were cleared, thereby helping demand in Rajasthan. However, sand availability problem hurt cement demand in Rajasthan. Prices in the non-trade segment were hovering ~Rs/bag. However, Punjab witnessed a pick-up with prices in the non-trade segment ranging from Rs240-Rs260/bag. Outlook: Secular pick-up in cement demand was absent in most parts of India except a few pockets (relatively new states like Chhattisgarh, Andhra Pradesh and Telangana). The retail segment s weakness will persist as the real estate sector (organised and IHB) still stayed away. Liquidity-related problems also kept cement demand weak in an otherwise busy cement season. We expect the activity to pick up in the next couple of weeks and demand is likely to gain momentum in the next couple of months. However, this is likely to be largely in line with expectations, but may be further magnified following a weak base because of demonetisation impact in the base year. Harshit Dhoot Research Associate harshit.dhoot@nirmalbang.com +91-22-6273 8111 Prices largely unchanged MoM Region Feb-2018 (Rs/bag) Jan-2018 Feb-2017 (Rs/bag) (Rs/bag) 3MMA YoY Chg (%) 3MMA QoQ Chg (%) Eastern 315 315 279 13.1 1.6 Western 292 287 276 5.1 (4.0) Northern 297 293 295 2.3 (0.8) Central 315 319 299 7.8 3.6 Southern 336 334 331 1.7 3.2 All India 311 309 296 5.7 0.5

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Exhibit 1: Monthly price movement across various cities (Rs/bag) Region / city Feb-2018 Jan-2018 Feb-2017 YoY change (%) MoM change (%) Western 292 287 276 5.8 1.8 Mumbai 301 305 325 (7.4) (1.4) Ahmedabad 315 310 245 28.6 1.6 Surat 316 316 235 34.5 - Nagpur 265 290 (8.6) (3.6) Nashik 260-5.8 Pune 280 255 285 (1.8) 9.8 Eastern 315 315 279 13.0 - Kolkata 350 345 310 12.9 1.4 Raipur 250 245 230 8.7 2.0 Odisha 300 310 295 1.7 (3.2) Bihar 360 360 280 28.6 - Southern 336 334 331 1.5 0.6 Chennai 340 390 370 (8.1) (12.8) Hyderabad 310 280 300 3.3 10.7 Bengaluru 340 340 300 13.3 - Vizag 317 287 307 3.3 10.5 Kochi 375 375 380 (1.3) - Northern 297 293 295 0.6 1.1 Delhi 295 295 295 - - Jaipur 270 280 270 - (3.6) Punjab 325 305 320 1.6 6.6 Central 315 319 299 5.2 (1.3) Meerut 320 325 320 - (1.5) Indore 300 300 298 0.7 - Bhopal 314 315 299 5.0 (0.3) Kanpur/Lucknow 325 335 280 16.1 (3.0) Exhibit 2: India average cement price edges up YoY Exhibit 3: India average cement price compared with Wholesale Price Index-based inflation 390 310 163 125 230 88 50 India Avg WPI *base 100 India Avg 2 Cement Sector

Exhibit 4: Demand steady; excess supply puts pressure on prices 350 Exhibit 5: Healthy demand continues, certain pockets in the region faces supply scarcity 300 250 North Average Exhibit 6: Pre festival demand in western region (Gujarat), prices spurt East Average Exhibit 7: Healthy demand in Andhra Pradesh/Telangana; prices steady West Average Source:Nirmal Bang Research South Average Exhibit 8: Steady price trend continues in central India 350 300 250 Central Average Source:Nirmal Bang Research 3 Cement Sector

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