Hitting a wall
No quick fix
We believe the severe demand-supply mismatch that the industry displays will take
a while to correct. Contrary to the street, we do not expect capacity utilisation rates
to cross even the 85% mark by FY13, and we are of the opinion that it is too early
for a turnaround; we see it happening beyond FY13.
Pricing discipline unlikely to be sustained
We do not believe that the industry will be able to tide over the current phase
through pricing discipline, as it is too fragmented. Also, the current arrangement
would result in new capacities generating sub-par returns for a long time.
Strong balance sheets only prolonging the pain
The balance sheets of companies going into this lean phase are in much better
shape than during previous down-cycles, with leverage being close to zero in most
cases and sizable free cash generation. However, we believe this will only prolong
the current down-cycle as the companies would likely jump into the next phase of
expansion using the cash on their balance sheets earlier than they should.
Valuations to see more correction, in our view
We expect the returns generated by the companies during FY11-FY13 to be
significantly lower than those generated in the previous four years. Valuations, on
the other hand, have yet to adjust to this reality and we see room for correction in
most of the stocks.
Maintain Bearish stance, upgrading Shree Cement and Grasim
We maintain our Bearish view on the sector and retain our REDUCE rating on
Ambuja Cement, India Cement, ACC and Ultratech. We are upgrading Shree
Cement and Grasim Industries to NEUTRAL purely on valuation. Ambuja Cement
and India Cement are our top REDUCE ideas for their relatively high valuations
(adjusted for the returns that their assets generate).
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