Q2FY11 (Sept 2010) Cement, sector preview by Centrum,

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High on Steroids - Despite bleak quarter
We remain Underweight on the Cement sector, given
the fact that a significant run-up in the valuation has
taken place over the last quarter, primarily pumped up
by “steroids” in the form of news of cement price hikes.
Our view is based on the challenging demand-supply
balance in the industry expected over the next two
years, which makes us doubt the sustainability of recent
price hikes. Given the rich sector valuation, any
negative news flow on cement pricing could lead to
sharp pressure on cement stocks over the next six to
nine months. We retain a Buy on Grasim and Orient
Paper, a Hold on Shree Cements and a Sell on ACC, ACL,
Ultratech Cements and India Cements.
􀂁 Despatch growth muted: Cement despatch growth
for Q2FY11remained subdued at 3.4% YoY at 47.7mn
mt, as against 10.5% YoY growth in FY10. Given the
high base in FY10 and the completion of a few major
infrastructure projects, there remains a threat to our full
year (FY11) despatch growth of 10%.
􀂁 Quarter to witness the impact of cement price
drops: During 2mQ2FY11, cement prices saw a sharp
correction of about Rs90/bag in the south and central
regions and about 25-60/bag in other regions. The
impact of the recent drops is likely to be reflected in
the Q2FY11 results, with operating profit and PAT of
our coverage universe declining 44% and 58% YoY,
respectively.
􀂁 Recent price hikes unsustainable: However, cement
prices were hiked significantly in the southern region
during September 10, through production discipline
amongst players. However, we doubt the sustainability
of these hikes on account of the challenging demandsupply
dynamics.
􀂁 We remain Underweight on the Cement sector:
Sector valuation has run up significantly during
Q2FY11, with the sector showing sharp
outperformance in comparison to the NIFTY. (Frontline
stocks up between 14%-26%, vs 16% rise in NIFTY.)
However, given the challenging outlook over the next
six months, the sector valuation appears rich, at a PE of
about 17xFY11E, EV/E of 8.8 xs, P/BV of 2.8x and EV/ton
of $130-180. We maintain our Underweight view on the
sector. At the same time, we also retain a Buy rating on
Grasim Industries and OPIL, on account of the
significant undervaluation of the stocks.