Indian Cement: Px hike: north to follow south? asks CLSA

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Px hike: north to follow south?
Following the price hikes in south India, our channel checks indicate that
players in north are likely to announce a price hike of Rs15-30/bag today.
This would be driven by producer discipline, despite no improvement in
demand trend. Feedbacks from south indicate that price hikes effected 2-3
weeks back have been gradually absorbed. We however remain sceptical of
hikes sustaining given high capacity surpluses. Grasim, Shree are our
preferred picks in the sector; Shree, Ambuja have highest leverage to north
cement prices in our coverage; JK Lakshmi, Binani, Mangalam and JK Cement
(non-coverage) also have high exposure to north.
North follows the footstep of south; px hikes likely to be announced today
􀂉 Our channel checks indicate that players in north India are likely to announce
a price hike of Rs15-20/bag starting today in the trade segment and Rs30-
35/bag in non-trade (bulk).
􀂉 This would be driven by producer discipline as demand trend continues to be
weak, though, should soon improve soon (demand pick up post monsoons).
􀂉 Interactions with market participants indicate that industry is serious with its
intend to take up prices after a sharp corrections in Aug-10.
Recovery from very low levels – do we know the bottom px?
􀂉 Interestingly, discussions indicate that extent of price drops in Aug-10 were
much higher that our estimate and may even be higher than street estimates.
􀂉 Prices, for example, in Jaipur dropped to Rs195/bag in end-Aug and likely rise
of Rs20/bag still implies that price would be marginally lower than July.
􀂉 The declines have been even higher in non-trade (bulk) segment. For
example, prices in Jaipur went down to Rs150/bag (cf. Rs180/bag in Jul-10)
and would likely rise to Rs185/bag post the hikes.
􀂉 There may negative surprise in 2Q results given the erratic price movements
during the quarter; realisations may therefore be lower than estimates.
Px hike in central India; watch for inflows from north/ west
􀂉 Our interactions with industry participants in central region indicate that
cement prices have been increased by Rs15-25/bag, beginning this week.
􀂉 Post these hikes, there have been rise in inflows from north/west; post hikes
in north, inflows into central should come down which should help.
Feedbacks indicate hikes in south absorbed; early to conclude though
􀂉 Our interactions with dealers in south indicate that price hike of Rs30-50/bag
has been implemented; we however highlight that it may also be early to
conclude considering the hikes were announced only 2-3 weeks back.
􀂉 Dealers are also unsure of this sustaining given weak demand trend and
continuing capacity additions.
Newsflow to improve, risk-reward not in favour, though; UWT stays
􀂉 Newsflow should remain positive for the sector: a) demand improves with pick
up in construction activity b) base effect sets-in and demand growth improves
YoY; c) px hike get kicker from improved demand conditions.
􀂉 From a medium term perspective, we are sceptical on sector fundamentals as
we expect operating rates to average at 79-82% over FY11-12 (20-years low)
and hence, effort to raise prices may only be temporary.
􀂉 We maintain our U-WT stance from a one year perspective, therefore.
􀂉 We highlight that 1% change in realisation impact EPS by 4-5.5% for ACC,
Ambuja, UltraTech; 19% for India; 2.5% for Grasim.
􀂉 Grasim, Shree are our preferred picks in the sector; Shree, Ambuja have
highest leverage to north cement prices in our coverage; JK Lakshmi, Binani,
Mangalam and JK Cement also have high exposure to north markets.