Cement- Foundation for next upcycle:: ICICI Sec

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Cement companies posted robust despatches for October ’10 with top three
groups registering 20.8% MoM / 26% YoY growth. This could, in our view, be
partly attributed to low base effect (owing to festivals last year) and pent-up
demand post monsoon. Nonetheless, strong despatches signify better volume
growth and likely sustenance of hiked price going ahead. Overall, based on the
despatches of top three groups, we estimate industry-wide growth of 21-24% YoY
– one of the highest ever monthly YoY growth over last decade – to 18.5-19mnte
for October’10. All-India utilisation is expected to have inched up to ~82-83% from
~70% in September ’10. Particularly, utilisation excluding South is likely to be
>85%, thereby providing enough room for better pricing as the busy construction
season sets in. We maintain that cement is a structurally strong domestic growth
story and any weakness should be used as a buying opportunity. Cement stocks
have outperformed broad indices by 7-33% over last one year.




􀁦 Strong despatches for October ’10. After lacklustre performance over last 18
months, ACC registered 21.5% MoM / 13.6% YoY volume growth to 1.92mnte.
Ambuja Cement (ACEM) posted 18.2% MoM / 19.5% YoY volume growth to
1.75mnte and UltraTech Cement logged in 20.1% MoM / 21.4% YoY growth to
3.42mnte. Jaiprakash Associates, backed by robust capacity addition, grew its
despatches (including clinker sale) 25% MoM / 79% YoY to 1.46mnte.Shree Cement
posted volume growth of 13.7% MoM / 24% YoY to 0.869mnte, excluding clinker
sale of 0.125mnte.
􀁦 We maintain demand could surprise in H2FY11 and FY12 as mentioned in our
recent report ‘Bonding strength: Part II’ given: i) boost in infrastructure spend by the
Government in the last 12-18 months of the XI Five Year Plan; ii) normal monsoon
leading to better rural housing demand; iii) forthcoming elections in a few states; and
iv) lower base effect. Continuous positive surprise on demand is a key to our
positive stance on the sector.
􀁦 Positive stance continues as we believe earnings could surprise and sector
could re-rate. We expect the pace of capacity addition to decelerate and demand to
surprise positively. We believe that the next 12 months would lay the foundation for
the next upcycle. Recent ‘unreasonable and arguably unsustainable’ price hikes in
the South could lead to a gradual pan-India price hike, as busy construction season
resumes post monsoon and festive season.
􀁦 ACC and Grasim, our top picks in the sector. ACEM would continue to enjoy a
valuation premium owing to better market mix. Volume growth is likely to return for
ACC post December ’10 and accordingly its discount to ACEM should decline in our
view. Holding company discount of ~40% to Grasim Industries’ cement business is
unwarranted in our view and we expect the discount to reduce.