>CEMENT SECTOR: Price hikes across regions (RELIGARE SECURITIES)

Cement prices across India have increased in the range of Rs 5–20/bag in February. The northern (New Delhi) and southern (Bangalore) markets registered an increase of Rs 10/bag, while in the west (Mumbai), rates moved up by Rs 5. The eastern and central regions logged the steepest price hikes of Rs 15–20. Dealers anticipate a further uptick in pricing, particularly in the central and western regions. We expect a buoyant fourth quarter for the sector on the back of strong volumes and pricing, despite a likely roll-back of the excise-duty cut in the forthcoming Budget. We maintain Grasim Industries, Shree Cement and Birla Corp as our top picks.

■ Price hikes of Rs 10/bag in Bangalore and Delhi: Our dealer checks indicate that cement prices in the southern market of Bangalore have increased by Rs 10/bag in February. However, in Andhra Pradesh and Tamil Nadu, prices have remained stable at Rs 145–170/bag and Rs 215–220/bag (Chennai) respectively. New Delhi in the north has seen a price rise of Rs 10/bag in February.

■ Western region sees price increase of Rs 5/bag: Mumbai has logged an increase of Rs 5/bag in February and dealers opine that prices in this market could rise further. Rates in Gujarat too are expected to increase by Rs 5/bag in the next 5–10 days. Our channel checks suggest that Gujarat is no longer facing a situation of short supply and hence the likelihood of price hikes after 15 February is low.

■ Sharpest hikes in central and eastern regions: Rates in the eastern market of Patna have increased by Rs 20/bag. The central region, particularly Uttar Pradesh, has seen a similar hike of Rs 15–20/bag with a further increase of Rs 10–15 expected. We reiterate that prices will continue to rise in the short term as demand remains strong, particularly in these regions.

■ Expect excise duty increase in Budget: We expect the excise duty on cement to be rolled back to 10% from 8% in the current budget, which could be marginally negative. This apart, the industry expects the government to reduce the duty on imported coal.

■ Cost inflation a major concern: Over the last two months, imported coal prices have risen by 25% to US$ 90–93/tonne. This steep inflation is a major concern for all large cement companies in general and India Cements in particular (55–60% of requirements met via imported coal). The price escalation is estimated to increase production costs for cement companies by Rs 30–100/ tonne.

■ Sector to outperform in the short term: Although we are currently Neutral on the sector, we believe that cement stocks could outperform in Q4FY10 as demand remains buoyant. Also, with price increases across the country, sequential EBITDA margin expansion is likely.

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