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Party in the North

Robust demand in the north, central and eastern parts of the country has been fuelled by strong volume growth in the cements sector

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Cement manufacturers are a happy lot these days as cement is one of the rare commodities that is doing brisk business. Strong demand from the North, West and Central India saw double-digit volume growth in Q2. While large caps did well - Shree Cement and Ultratech reported volume growth of 18.6 and 12 per cent respectively, it was the midcaps the stole the show with volume growth of as high as 30 per cent (y-o-y). Mangalam Cement, Heidelberg and JK Cement top the volume growth charts in midcaps.

Weak demand in the South meant that manufacturers there did not join the party the rest of country was enjoying. Capacity additions of the past couple of years seems to have caught up. Madras Cement, Dalmia and India Cements infact, saw volumes decline.

Realisations pick-up
The monsoon months generally see realisations fall. This year too realisations fell by 5-6 per cent (q-o-q) in the North, yet on a yearly basis they were still up 8 per cent on the back of higher prices. Manufacturers of southern India also saw realisations improve by around 10 per cent following price hikes in June this year.

Outlook
What's really got cement manufacturers excited is the government's infrastructure push with such construction programmes like the dedicated freight corridor, concrete roads, Grameen Awaas, Indira Awaas Yojana and projects like Swachh Bharat that will see the construction of 110 million toilets in 5 years. According to Axis Capital, these programmes could generate incremental cement demand of 20 million tonnes per annum. Housing generates two-thirds of total demand of the cement industry. Moderating interest rates and an improving economy should help motivate fresh home buying.

The cement sector in the meantime trades at 24.5 times on the bourses. Though not cheap, cement is one of the few sectors whose outlook appears better than other cyclicals at the moment.

Star performer of the sector
Shree Cement
North-based Shree Cement is one of the most profitable cement companies in the country. High usage of pet coke, locational advantage and captive power consumption helped Shree report Ebitda/tonne of ₹933/tonne (FY14) compared to industry level of ₹692/tonne. It will add 5 MT within the next three years. With demand in the North realisations should grow.

North-based manufacturers are seeing better volume growth than South-based

Company NameSales Growth YOY PAT Growth YoYTTM EPS (G) YoYTTM Ebitda margin (%)D/EROCE
(%)
Ultratech Cement0.0984-0.009-0.009620.130.4313.67
Ambuja Cements0.05650.24720.244323.74017.04
Shree Cement0.1296-0.2365-0.236525.930.2517.1
ACC0.04760.04040.040415.72016.45
The Ramco Cements-0.0127-0.2498-0.249818.061.195.94