Goldman Sachs: Cement Sept despatch growth remains muted; reiterate cautious stance

India: Construction: Cement
Sept despatch growth remains muted; reiterate cautious stance


Cement despatches in September up 6.2% yoy; down 1.5% mom
All India cement despatches for September stood at 15.6 mn MT, up 6.2%
yoy, down 1.5% mom. 1HFY2011 despatches stood at 100.8 mn MT, up
5.1% yoy. This is the sixth consecutive month to witness mom decline.
Even if we assume a 10% yoy growth for 2HFY2011 on the back of a good
monsoon this year, despatches for FY2011 would work out to around 215 mn
MT (vs our expectations of 220 mn MT). Hence, we see a downside risk to
our FY2011E assumption of 11% yoy growth in cement despatches.
Demand outlook optimism yet to translate into growth numbers
The growth in all-India cement despatches continues to be muted—we do
not believe the base effect has played a major role here, notwithstanding a
delayed monsoon in FY2010. In 2009, cement despatches had bottomed out
(or monsoon had peaked) in September before picking up in October—by that
measure, growth in despatches for September 2010 should have seen a
higher yoy growth. However, we note that 2010 has seen an extended
monsoon and we will look at the despatch numbers closely in the coming
months to ascertain if growth deceleration is just a seasonal/base effect
phenomenon or is driven more by a structural slowdown.
Weak 2QFY11 results could potentially drive earnings downgrades
Notwithstanding price hikes announced in a few pockets in the past few
weeks, we expect overall realisations to decline by 10%-15% qoq in
2QFY11. Coupled with higher costs, we believe this is likely to drive
severe margin compression for the sector (1200 bp yoy, 600 bp qoq). In
our view, this could potentially drive consensus downgrades which will
be a negative catalyst for the sector.
Valuations ahead of fundamentals; remain cautious
We reiterate our cautious stance on the sector and advise booking profits on
recent rally (cement stocks under our coverage up about 20% since July).
Current valuations are at 1 S.D. above mean levels (on both EV/RC and
earnings based measures). We reiterate Sell on ACC (ACC. BO; on Conviction
List) and India Cements (ICMN.BO). ACC is trading at 138% EV/RC, which is
significantly ahead of its mid-cycle valuation of 100% EV/RC. India Cements is
trading at an FY11E EV/EBITDA of 10.2X and P/E of 20X vs the sector average
of 7.2X and 14.8X, respectively, making it the most expensive cement stock in
our coverage universe on earnings-based multiples.