We reiterate our Hold recommendations on LafargeHolcim (LHBL BD) and Heidelberg (HEID BD), but revise our TPs to BDT36 (from BDT52) and BDT254 (from BDT331), respectively, suggesting an ETR for LHBL of 1.6% and for HEID of 12.2%. This reflects the impact of volume-dependent top-line growth amid ongoing price competition among the grinders. Our cautious view on the two stocks stems from continuing price competition from local grinders, the higher price of raw materials and likely pressure on volume from recent price rises, driven by new tax rules and a gas tariff hike.
Remain watchful. Due to the scarcity of Vietnamese clinker, the clinker import price skyrocketed to US$53/tonne in May, 10% higher than the 2018 average. Moreover, price rises for other raw materials, freight cost rises (due to fuel and charter cost increases), higher transport costs (due to weight restrictions on highways imposed by the government), significant BDT depreciation against USD and higher debt costs (due to the liquidity crunch) have hit the profitability of Bangladesh cement manufacturers and are likely to continue to do so. Manufacturers have been unable to pass on their increased costs to customers and have seen their margins erode.
The retail price of each 50kg bag of cement increased in several phases in July 2019 and in H1 CY 19, attributable to the Bangladesh Energy Regulatory Commission (BERC) increasing the gas tariff by c40%, the new tax on the import of raw materials from FY 19/20 and the higher import price of clinker. Retail prices of Scan, Supercrete and Holcim were BDT470-480/bag on 6 July. If the new price level holds, it should offset the higher gas tariff and tax burden. However, the increased price will put pressure on volume growth. For 2010-18, the cement industry has grown by c11% annually. We expect local cement sales to grow at c8% CAGR in 2019-27.
As industry utilisation is growing (62% in 2018 from 54% in 2017), we expect the current overcapacity situation and competitive pressure from local grinders to ease from 2022, and companies to be able to charge higher prices from 2022 onwards, to more than cover the cash cost expense. For 2019-21, we expect the retail price to grow by 3.7%, passing on the cash cost expense to customers, thereafter growing by 4.2% annually in 2022-27 (versus our previous 5% price growth estimate), passing on more than the cash cost.
Risks to our recommendations include higher imported clinker costs, rising gas tariffs for indigenous power and unplanned capacity additions. Previously, most companies have adopted unplanned capacity expansions just to hold their market share. If the unplanned capacity additions continue, the oversupply could increase, resulting in continued price competition. Moreover, if the imported clinker price from Vietnam and local gas tariffs increase further, margins could come under even more pressure.
This Bangladesh cement update is a joint report from Tellimer and its research partner in Bangladesh, IDLC Securities, as we bring together our coverage. This report discontinues Tellimer’s independent coverage of the sector. Changes in forecasts and ratings are changes from Tellimer’s previous forecasts and ratings.