Cement — Firming Up After The Rains :: Ambit

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Sector well placed compared with the last downcycle; recovery to be faster in this cycle

We have analysed the performance of the Indian cement industry over the last 10 years a downcycle period (FY01-04) followed by an upcycle period (FY05-10). Our analysis suggests that industry (particularly leading manufacturers) has developed/enhanced strengths that equips it to weather the current headwinds with relatively lower impact.

With the monsoons behind us, we expect cement demand to grow at >10% YoY 2HFY11 onward, aided by a surge in infrastructure activity and increased spending on the housing segment. A slowdown in the pace of cement capacity addition should further boost the sector’s capacity utilisation to >85% from 2HFY12 thereby keeping prices at stable levels and driving the sector’s recovery from the current downcycle.

We like Shree Cement, UltraTech, Ambuja Cements and ACC based on operational capabilities, which provide them with significant competitive advantages. 

These advantages are:

• Cost savings through higher captive power generation: Shree Cement and UltraTech Cement are best placed on this front
• Infrastructure support and distribution reach: UltraTech Cement is the industry benchmark
• Higher asset turnover: ACC and Shree Cement lead with ~1.3x asset turnover
• Strong balance sheet: Ambuja is best placed with net DER of -0.4x

Initiate coverage on Shree Cement, re-initiate coverage on UltraTech Cement, Ambuja Cements and ACC

We have used 2-stage DCF valuation models to value these stocks and these models imply 28% upside for Shree Cement and 16% for UltraTech. Hence we have BUY recommendations on both of them. Our DCF models also indicate upside of 11% for Ambuja Cements and 14% for ACC. Hence we recommend aHOLD for these two companies.

Our fair value for UltraTech, ACC and Ambuja (pan India cement majors) implies a target multiple of ~8x their 1 year forward EV/EBITDA, similar to the multiple at which ACC and Ambuja had traded during the last downcycle period. Our fair value for Shree Cement implies a multiple valuation ~ 6.5 x its FY12 EBITDA (cement business) which is in line with comparable regional cement companies (Madras Cements and India Cements).