Deep Mukherjee of India Ratings Says He Expects The Cement Sector to Grow 5-8%

Cement stocks have fallen sharply this week. In an interview to CNBC-TV18, Deep Mukherjee of India Ratings says he expects the cement sector to grow in the range of 5-8 percent for calendar year 2013.

Below is the edited transcript of his interview on CNBC-TV18.

Q: What is your view on the proposal that the government has undertaken about a hike in diesel prices for bulk consumers, which could eventually impact or increase cost for many of these cement, mining companies etc? Do the cement companies have the pricing power to protect themselves, can they pass on this price hike easily? How would you approach this particular news?

A: I think the impact could clearly be on the non-integrated players, basically the smallest cement players who would have not got assured linkages or don t have well-established fuel or power supply or ability to generate it. So, definitely the top five or six players would have a very limited impact because of this ruling. It would not be zero, but the impact would be limited.

However, down the order you have cement players who have a significant dependence on diesel. This set of cement players would be very significantly affected. Now, cement realisation has increased in the last 12 months. But obviously there has been a minor correction in cement prices in the last couple of months. Going forward, we expect that the growth in cement would still be positive. We expect in the range of 5-8 percent for calendar year 2013.

The ability to pass on the price would be very limited. They would be competing with well-established player who would not be getting hit by this specific cost item. So, one can actually see the bigger guys getting more market share possibly at the cost of smaller companies.

Q: We have the last number for November for cement output, which comes as part of the core sector numbers, infrastructure numbers. The cement output has actually fallen. November is normally a good month because the monsoons are over in large parts of India. But cement production month-on-month has fallen rather sharply by about 6-7 percent and even on year-on-year terms it has fallen by about 0.2 percent, not very big. After growing rather seminally between, in some months even double digits and definitely at a minimum of a 7 percent, this came as a bit of a jar. We have seen the stock markets reacting to it and marking those stocks lower. How would you compare this 5-8 percent vis-Ã -vis 2012? Do you think after looking at November numbers you would get a little doubtful about the 2013 performance?

A: Firstly, the November numbers are not exactly a surprise. We have done some analysis. Post April 2008, it looks like the cement production was driven by activities and housing and commercial real estate.

Now, if one analyses why cement production grew at double digit in most of FY12, it was for two reasons. One, FY11 was a bad year where it had almost grown at negative. But the housing related activity and commercial real estate activity was very robust. From September 2010 to March 2012 housing sector loan has grown by on an average 15 percent, commercial real estate credit has grown by 16 percent between the period September 2010 and March 2012.

However, post March 2012, we see that loan to housing sector has grown by only 13 percent, which is a 3 percentage point fall. If I look at commercial real estate, it is still around 5-6 percent incremental growth rate.

Q: How do you support the demand growth in that case?

A: There would be a base demand growth, but the surge in demand that one has seen in FY12 or even in the early part is likely to subside. So, it would not be a 0-3 percent growth.

Q: What is the pricing trend that you are witnessing?

A: On an overall basis, pricing is likely to fall by 5-10 percent from current level. the smaller guys would have to take a bigger cut.

Q: If demand will not be as good as previous year and prices will fall, why have you upped the rating from negative to stable to negative?

A: Yes because the downside risk are very limited from hereon. It is stable for maybe the top five-six integrated players. We expect their margins to remain at FY12 levels, which is in the 23-24 percent, whereas for the smaller guys the pressure would continue to be there.