Cement- October growth unsustainable : BofA ML

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October growth unsustainable


􀂄 Robust volume growth in October unlikely to sustain
In Oct ’10, cement majors like Ambuja and Aditya Birla group posted 20-21% YoY
volume growth while ACC’s volumes grew 14% YoY. This marks a sharp recovery
versus Apr-Sep ‘10 volume growth of ~8% YoY for Ambuja, ~4% YoY for the
Aditya Birla group and -4% YoY for ACC. We think the industry’s volume growth is
unlikely to sustain around the robust levels witnessed in Oct ’10 and estimate 2H
FY11 (Oct-Dec ’10) demand growth at ~10% YoY on an optimistic basis.


Industry feedback points to one-off boosts to growth
Our industry feedback suggests that in addition to seasonal post-monsoon
recovery in demand, October volumes were probably boosted by 1) late-diwali
this year so no slowdown in construction during October, 2) higher volume offtake
by trade channels due to rising cement prices.
We expect cement prices to fall
We expect cement prices to fall as the industry’s capacity utilization is likely to be
lower YoY in both FY11 and FY12, reflecting pressure of overcapacity. We
estimate the industry’s capacity utilization at ~78% in FY11E and 77% in FY12E
vs 85% in FY10. Our supply-demand forecasts assume 10% YoY growth in 2H
FY11E and FY12E. Our sensitivity analysis suggests that demand must rise at
least ~12-15% YoY for capacity utilization to be ~80% in 2HFY11-FY12E.
Cement prices have risen sharply recently
Cement prices on a pan-India basis are currently averaging ~Rs244/bag vs a low
of ~Rs227 in 2Q FY11; the price recovery has been swift (mostly in October).
Barring west India, cement prices in most regions are up YoY despite probable
lower capacity utilization; we think this reflects rational producer behaviour. Also,
compared with pre-monsoon (1Q FY11) levels, cement prices are nearly at par or
higher in most regions except in west and central India.
Valuations seem rich; we f’cast earnings decline in CY11E
On an EV/EBITDA basis, stock valuations of majors like ACC and Ambuja are
largely on par with the local market for CY10E and at 15-30% premium for
CY11E. On a CY11-EV/capacity comparison, ACC is trading at ~US$140/ton
while Ambuja is trading ~US$180/ton versus replacement cost of ~US$120-
125/ton. We think valuations are rich given forecast YoY earnings decline in
CY11E. Further, we think risk to our estimates is on the downside