Anand Rathi: Price increase of Rs10/bag expected in key markets

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CEMENT: Price increase of Rs10/bag expected in key markets; Past precedents of cartelization have not sustained beyond 3-4 months; Sustenance of price increase to drive earnings upgrade of 14-62% in FY12 estimates

We interacted with various cement dealers and marketing personnel of cement companies across regions and across brands, to get an update on the evolving demand-supply scenario, pricing trends and short-term outlook. Key takeaways:

-          Price increase of Rs10/bag expected post Dussehra (Monday) in all the key markets (except East & Gujarat), driven by understanding among players. This price increase is on the back of increase of Rs10-90/bag increase since Sep-10 across all regions.

-          Prices in the key Southern market have surpassed peak prices of 1QFY10, driven by disciplined production cuts.

-          Post monsoon, demand has started picking-up except South, despite some slowdown in a few markets.

-          Post festive season (Dec-10 onwards), cement prices can further increase as peak construction season begins.

-          If current prices sustain in FY12, our FY12 EPS estimates could see upgrade of 14%-62%. Past precedents of cartelization to drive price increases have not sustained beyond 3-4 months.

Prices expected to improve by Rs10/bag, driven by pricing discipline and improvement in demand

-          Cement prices are expected to further increase by Rs10/bag across all the key markets (except East and Gujarat). This price increase is on back of increase of Rs10-90/bag increase since low levels of Sep-10 across all regions.

-          Prices in the key southern market have surpassed peak prices of 1QFY10, driven by diligent production cuts. Post price increases next week, average pan-India prices at Rs254/bag would also be near peak prices of Jun-Jul’09 (~Rs255/bag).

-          Prices increase is result of demand recovery post monsoon (all regions except South) coupled with production cuts (South and North).

-          Price increase is prevalent in both trade and non-trade segment.

-          Prices are further expected to increase post festive season (Dec-10 onwards) as peak construction season commences.

Valuation and view

-          We believe that we have already witnessed bottom-of-the-cycle utilization, pricing and profitability in 2QFY11, and it should gradually improve from hereon.

-          However, presence of sustainable demand drivers and expected gradual recovery in utilization from 3QFY11 would make foundation for the next upcycle.

-          We prefer companies that are ahead of the curve in adding capacity, along with strong cost saving possibilities.

-          Among large cap stocks, ACC and UltraTech remains our top pick, while we prefer Birla Corp, India Cement and Shree Cement among mid-caps.