BNP Paribas: Cement: INDUSTRY OUTLOOK

Cement: INDUSTRY OUTLOOK
􀂃 Dealer checks indicate price recovery in South while North & East lag.
􀂃 UTCEM to report 50% q/q decline in EBITDA, realizations down 16% q/q.
􀂃 ACC 3Q10 sales to decline by 16.6%y-y, EBITDA decline of 44.6% q-q.
􀂃 ACEM 3Q10 sales to decline by 2.8%y-y, EBITDA decline of 41%q/q.
The basket case - F2Q results
2QF11 - Muted volume growth, ASP declines + rising costs
We are previewing Indian cement sector’s September quarter results. Stocks
under coverage have reported significantly lower volume growth in September
quarter, than expected. ACC and Ambuja have lost share (growth of -6%, and
5.6% y/y), UTCEM (incl. Samruddhi) grew volumes in-line with market at 5%y/y.
Volume momentum has remained weak so far (we had earlier cut sector volume
growth from 10% to 8%y/y for FY11). Our checks indicate that there haven’t been
significant price increases in the north and in the east while prices in the south
have recovered from lows despite weak demand outlook. We believe sector
profitability will structurally alter due to lower pricing power on excess capacity
and higher fragmentation and escalating costs.
UTCEM will be the worst hit - consol. EBITDA down 50% q/q
For 2QF11, we believe UTCEM (including Samruddhi) will report sales of
INR30.8bn (down 23% q/q) and EBITDA (excluding other income) of INR 5.02b
(down 50% q/q). UTCEM’s high exposure to the south and to the west has led to
a 16%q/q drop in domestic cement ASPs. Also, the company should see
sequential increase in power and fuel costs as well as other expenses (higher
R&M costs). We have incorporated consolidation of Samruddhi with UTCEM and
we have published consolidated financials of the combined entity. We are revising
our TP to INR790 (INR870) based on an average of 1) EV/EBITDA based fair
value of INR684 based on 6.5x our FY12 EBITDA of INR30.5b and 2) EV/ton
based fair value of INR897 based on an EV/ton of USD115/t.
ACC’s 3QC10 reflects mkt share loss & pricing pressure
For 3QC10, we believe ACC will report sales of INR17.3bn (down 16.6%y/y; down
20.6% q/q) and EBITDA (excl. other income) of INR 3.05b (down 44.6% q/q).
ACC is particularly affected by declines in both volumes (6% y/y decline for
3QC10) and pricing (decline of 10.8% q/q). ACC’s EBITDA/t will likely decline
from INR1045/t to INR649/t.
ACEM will report relatively better numbers than peers
For 3QC10, we believe ACEM will report sales of INR15.6bn (down 2.8%y/y;
23.6% q/q) and EBITDA (excluding other income) of INR 3.54b (down 41% q/q).
We believe Ambuja’s numbers will be relatively better than peers due to internal
sourcing of clinker, which should drive down RM costs.