Ambit 2QFY11 Result Preview Banking Cement

CEMENT
 We expect a sharp decline in performance across cement companies in
2QFY11 as it is one of the worst quarters for the cement sector. Weak demand
due to timely arrival of the monsoons in most parts of India resulted in lower
demand and a drastic fall in the prices of cement.
 Average cement prices (all-India) have corrected by ~10% YoY with price
correction in the central, western and southern regions falling by 12-16% YoY
and stable price scenario ruling in the northern and eastern regions (~3%
correction YoY). Prices recovered to some extent in the southern and western
regions during the later half of September as cement players tried to share the
impact of high input costs with the customers.
 Demand grew by 3% YoY as against 12% growth in 2QFY10. However, no
new capacity got commissioned in the quarter. Capacity utilisation appears to
have bottomed out at ~74% witnessed in 2QFY11.
 We expect revenues to decline 10-20% YoY for companies in our coverage.
 Additionally, cost pressure has gone up as fuel cost and logistics expense have
shot up. These would further drag operating profits down by 30-60% YoY for
these companies.
 Interest cost is not a concern for companies under our coverage as their net
debt level is negligible. Except for Shree Cement (which follows an aggressive
depreciation policy and hence higher impact on net profits in the quarter in
which they commission a plant), we expect net profits to decline by ~55% YoY.
 UltraTech’s performance is not strictly comparable, as the current quarter
would reflect the combined performance of UltraTech and the newly merged
Samruddhi Cement.
 We expect cement demand to increase in 2HFY11 as construction activities
pick up. This should also lead to higher realisation for the companies under
our coverage.
 Our top picks are Shree Cement and UltraTech Cement.