Morgan Stanley Research:India Cement: Like UltraTech and Ambuja

India Cement
Taking a Breather For Now;
Better Entry Point Around
Sep-10 Quarter Results
Investment conclusion: Cement stocks have rallied
hard and outperformed broader markets by around 15%
in the past two months. This has been driven by news
flow of cement price rises (in the past few weeks),
predominantly in South India. We remain positive on the
sector given our expectation of a sustainable increase in
cement prices in F2H11 on the back of improved
demand. However, in our view, stock performance could
take a breather in the near term given 1) the recent
outperformance and 2) our expectation that companies
will report lower profitability for the quarter ending
Sep-10. We believe this could provide a better entry
opportunity to take fresh positions.
The recent market exuberance seems to ignore
likely subdued results ahead: Companies have raised
cement prices by around Rs20-30 per bag in South India
in the past few weeks. More recently press reports (The
Financial Express Sep 22, 2010) have suggested that
another round of price hike is likely, including in other
regions. Our recent channel checks too corroborate this.
This could trigger another round of rally in the stocks.
However, we believe that in its exuberance over the
cement price hike in seasonally weak demand period,
the market is ignoring the outlook for near term results.
In our view, QE Sep-10 results will witness the impact of:
1. Lower realization: Cement prices were raised in the
current month and that too from levels where companies
were making cash losses (particularly in the South). In
our estimate, realizations would be down around 6-9%
for the quarter for our coverage universe resulting in
lower EBITDA/ton.
2. Maintenance costs are likely to increase during the
quarter as companies take annual shut downs in weak
demand period. Given that sequential volumes too are
relatively muted, per ton cost is likely to tick up. We do
not see significant near term cost pressures otherwise.


We are positive on the sector beyond QE Sep-10 on the
back of: 1. our view that demand remains key and the pick up in
demand post monsoon will drive cement prices higher,
2. capacity concerns are overdone and growth in effective
capacity is relatively modest, in our view and 3. we believe that
higher capacity with pure play cement companies in the current
cycle (unlike previous ones in which cement was
predominantly housed in conglomerates), implies higher focus
on profitability.
Of the stocks we cover, we believe Ultratech (ULTC. BO,
OW) is likely to witness the greatest relative negative
impact: Given Ultratech has around 55% exposure to South
and West (based on capacity and including Samruddhi’s
capacity) it will be worst hit on a relative basis. Ambuja
(ABUJ.BO, OW) is likely to see the least impact on EBITDA/ton
in our view given that it has no exposure to the South and
around 30% exposure in the West. Moreover, Ambuja could
see some benefit from lower clinker cost on sequential basis as
it shifts to own clinker.