Cement-Price hikes induce despatch growth:: IIFL

Visit http://indiaer.blogspot.com/ for complete details �� ��

Price hikes induce despatch growth

• Major cement companies reported a strong YoY growth in
despatches for October 2010.
• Our interaction with dealers indicates that consumers and
dealers have increased inventories fearing higher prices, as
producers increased prices sharply at the start of the month and
in few places even gave a weekly plan for price hikes.
• Increase in inventory with consumers and dealers and
continuation of sluggish demand has started putting pressure on
cement prices for the past two weeks in all regions, except the
western region.
• Our interaction with dealers from the southern region indicates
cracks in discipline, with few producers sharply increasing
despatches to benefit from higher prices.
• We maintain our negative outlook on the sector, given the likely
shortfall in incremental demand compared to incremental
supply.


Strong growth in despatches for October 2010: Cement majors
reported strong double-digit growth for October 2010. A low base in the
previous year, seasonal improvement in demand, and re-stocking
demand on account of rising prices is likely to have increased despatch
growth, in our view (increase in average inventory by consumers and
dealers by one day can increase demand growth by 3.2pps for October
2010). Based on the initial set of despatch numbers, we expect 20%
growth for October 2010. We expect industry’s growth rate to be higher
in 2HFY11 compared to our earlier estimates, as dealers and consumers
could increase stock levels further, due to a fear of sharp price hikes by
companies. We expect industry to grow at 8% for FY11 compared to our
earlier expectation of 7%.

End-user demand continues to be sluggish, as per dealers:
Dealers indicated that end-user demand, particularly in the residential
segment, continues to be sluggish, on account of sharp increase in
building materials in the past few months. Tightness in sand availability
in Maharashtra, Kerala and Andhra Pradesh, and brick availability in
Tamil Nadu is leading to delays in construction.


Prices decline in few regions: Cement prices declined by Rs10 per
bag in Chennai, Lucknow and Kolkata in the past ten days, on account
of increasing supplies and sluggish demand. Price increase of Rs10 per
bag put into effect in New Delhi on 20 October was reversed on 28
October, due to sluggish demand. Prices increased in Gujarat by Rs15
per bag in the past ten days. We expect cement prices to remain stable
to firm in the western, northern and central regions for the next few
months, on account of demand improvement due to a seasonal pickup
in construction. In the southern region, discipline is likely to break going
forward, as producers are likely to improve market share and increase
supply to benefit from higher cement prices. Hence, we expect prices to
decline in the south.