Cement prices have managed to hold up – Heidelberg Cement

Update on the Indian Equity Market:

On Friday Nifty closed 0.9% higher at 10,383. Among the sectoral indices, IT (+4.1%), PSU Bank (+1.0%), Metal (+0.6%) closed higher. FMCG (-1.2%), Realty (-0.9%) and Pharma (-0.5%) closed lower. Infosys (+6.6%), BPCL (+6.5%) and TCS (+4.9%) closed on a positive note. Bajaj Finance (-3.1%), ITC (-3.1%) and Bharti Infratel (-2.8%) were among the top losers.

Excerpts from an interview of Mr Jamshed N Cooper, MD, Heidelberg Cement with ET Now 25^th June 2020:

• Cement prices have managed to hold up even when the construction activity has halted. Mr. Cooper said it is a different mix and varies from state to state.
• Government spending is higher in many of the projects, the company is trying to complete before monsoon sets in.
• The labor availability is better in central India and South is weak as the market depends on migrant labor.
• Capacity utilization will be between 55% and 60%. Many of the cement companies have a very high breakeven. Most of the companies have high debt and to serve high debt with lower volume is a task. The cement companies have a pressure to keep price up as they have to maintain margins with lower volumes.
• The construction industry is not going to be hit so badly except for the monsoon period. Building industry, construction industry is one of the largest employers of the labor workforce, with their employment the infrastructure industry will come in picture.
• Either the government will provide employment or somehow employment is going to get generated in the building industry because there is a huge demand for housing. He added that it is the best time for the government to use this work force to start building rural houses for the poor so that this cycle can continue.
• About lockdown effect he said a mistake was made by keeping cement plant shut during lockdown. The cement was not getting in market place and labor force was ideal which had a cascading effect.
• A little bit of slowdown is expected in the construction industry and hence in the demand for cement. Going forward the labor will start returning after the monsoons sowing happens.
• It is expected that at least 60% of the labor is likely to return after Diwali. Once workforce gets back to their workplace’s things should be moving perfectly well.
• On housing infrastructure push led by the government, he said whole push has to be from the housing sector because 60% of the cement is used in the housing sector and in this at least another 5-7% will come from the government.
• The pricing is here to stay as companies cannot breakeven with lower volumes and if they don’t breakeven the companies will get in trouble.

Consensus Estimate: (Source: market screener and Investing.com websites)

• The closing price of Heidelberg cement was ₹ 182/- as of 26-June-2020.  It traded at 19.5x/ 12.2x the consensus Earnings per share estimate of ₹ 9.3/14.8 for FY21E/ FY22E respectively.
• The consensus average target price for Heidelberg is ₹ 197/- which implies a PE multiple of 13.3x on FY22E EPS of ₹14.8/-.

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