India’s cement consumption in 3QFY16 grew c4% y-y (vsc1% in 1HFY16), despite floods in the state of Tamil Nadu

　　Cement realizations fell c3% y-y, driven by price corrections inthe North and West; prices in the East and South were stable

　　However, aggregate EBITDA grew c23% y-y, driven byhigher volumes and crude oil related cost savings

　　We have aggregated the quarterly results of 14 cement companies (representingc70% of India’s cement consumption) and draw the following conclusions.

　　Demand growth rebounded despite floods in Tamil NaduAll-India cement demand growth for 3QFY16 was c4% y-y, higher than the just c1%y-y growth in the previous six months. Consumption growth in the third quarter waspulled down by the floods in the state of Tamil Nadu (in South India), which resultedin negative 5% growth in November 2015, with demand in South India contracting by16% in the same month. The listed cement companies reported volume growth ofc7% – higher than the all-India average.

　　Falling costs led to strong EBITDA growth

　　Aggregate costs in 3QFY16 fell an average c5% y-y, as lower crude oil prices led tofalling crude-related costs (power and fuel, and freight – c60% of overall costs). Onaverage, EBITDA rose to INR667/ton, up c11% y-y. Aggregate EBITDA at INR32bn grewc23% y-y, driven by higher volumes and cost savings, despite lower cement realizations.

　　Cement prices did not hold-up during the quarter, though…

　　Average cement realization fell c 3% y-y, driven by lower cement prices in the Northand West, while prices were flat in Eastern and Southern markets. On average, acement price fall of INR133/t in 3QFY16 meant that cement companies ended uppassing on the majority of the cost savings (cINR200/t y-y) to cement end-users.

　　…and have fallen more steeply since then

　　The fourth quarter (JFM period) is a seasonally strong quarter for cement demandand pricing in India. However, cement prices have fallen c9% from 3QFY16 averageprices. The steepest fall was in the Northern markets, with cement prices droppingmore than 17% in Delhi and Chandigarh, although they continue to be more stable inSouth India. With a large part of the cost savings already in corporate incomestatements, such steep cement price corrections raise questions regarding thesustainability of the strong EBITDA growth in 3QFY16.

　　We have Reduce ratings on the cement stocks under our coverage (ACC: ACC IN,INR1243.9, TP INR1139; Ambuja Cements: ACEM IN, INR193.6, TP INR173;Ultratech Cement: UTCEM IN, INR2816.35, TP INR2140).