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CEMENT: Oct-10 volumes above estimates; Entering strong season; Robust growth of large players can impact cartel
- Cement dispatches for Oct-10 reported so far are above estimates, as cement volumes grew 26% YoY (boosted by JaiPrakash’s volume growth of 82%).
- Volumes in Oct-10 are strong as demand picked up post monsoon.
- ACC reported 14% YoY growth in volumes to 1.92mt (v/s est 1.8mt), benefiting from commissioning of a 3mt brownfield expansion at Karnataka. We expect volumes to get a boost in 3QFY11 as recently commissioned capacities ramp-up operations.
- Ambuja reported 20% growth to 1.75mt (v/s est 1.6mt), benefiting from recovery in North India post heavy rains and flooding in Sep-10.
- A V Birla group reported 21.3% volume growth to 3.61mt (incl clinker).
- JaiPrakash reported 82% growth in volumes to 1.46mt (v/s est 1.4mt), benefiting from ramp-up of newly commissioned capacities.
- Based on these volume numbers and our interaction with dealers, we estimate ~12% volume growth in Oct-10. We estimate volume growth of 8% for FY11.
Robust growth of large players – Will it pose risk to the cartel?
- While strong growth could be taken as an indicator of demand recovering, we believe that focus on volumes by large players can create some uncertainty on sustaining the understanding. These production arrangements over medium term would be challenge to maintain as demand-supply dynamics would drive pricing.
- Cement prices have recovered sharply by Rs15-100/bag from lows of Sep-10 across all regions, resulting in average realizations rising back to 1QFY11 average.
- Demand should improve post December, which would help prices (it would be essential for pricing discipline to be sustained over next 2 months).
- We model average price increase of Rs5/bag QoQ in 3QFY11 and Rs5/bag QoQ increase in 4QFY11. For FY12, we model Rs5/bag average increase over FY11.
Valuations and view
- 2QFY11 results witnessed severe pressure on profitability, with average decline of Rs540/ton QoQ to ~Rs450-500/ton impacted by drop in realizations and negative operating leverage.
- Despite significantly below estimated 2QFY11 results, cement stocks have done well. Any disruption in cartel would result in severe cement pricing correction as well as stock price correction.
- We believe we have already witnessed bottom-of-the-cycle utilization, and it should gradually improve from hereon.
- The presence of sustainable demand drivers and expected gradual recovery in utilization from 3QFY11 would lay the foundation for the next upcycle.
- Among large cap stocks, ACC and Grasim are our top picks, while we prefer Birla Corp, India Cement andShree Cement among mid-caps.
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