Cement- Top 5 players report dispatches decline of 3.2% yoy:: Emkay

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Cement Sector

Top 5 players report dispatches decline of 3.2% yoy

n     Unseasonal rains, labor shortage due to festive season impact dispatches in November. Top 5 players report aggregate dispatch decline of 3.2%

n     Cement prices see some softness across regions - cuts of Rs 2-10/bag; across North, central & south. Dealers expect prices to remain sluggish till mid December owing to poor demand

n     Demand growth remains key to sustain prices hikes taken in October. Seasonal logistical bottlenecks (wagons supply to food grains & crop) could provide some support to prices

n     Remain NEUTRAL on sector, positive on ACC, Grasim & Shree, negative on Ultratech, India Cement & Madras Cement

Top 5 players report aggregate dispatches decline of 3.2% yoy

Cement companies posted muted dispatches for the month of Nov 2010 with top 5

cement producers registering aggregate dispatches decline of 3.2% yoy. Cement

offtake got impacted due to:

n No significant pick up in infra projects

n Un-seasonal rains (impact of 3-5 days across country)

n Diwali which occurred in November this year as compared to October last year

(usually leads to some slowdown in construction activity for 4-5 days)

n Labor shortage on account of harvesting & festive season

ACC dispatches up 4.8% yoy: ACC with 1.74 mnt dispatches registered a growth of 4.8%

yoy (9.4% MoM decline. However on YTD basis ACC dispatches declined by 1.1% yoy.

Ambuja Cements dispatches decline 8.4% yoy :On account of strike by freight operators

at its Himachal Plant (Rauri & Suli) Ambuja Cement reported a decline of 8.4% in

dispatches. Its YTD growth still is healthy at 7.1%yoy.

Ultratech volumes decline 9.2% yoy: Ultratech reported volumes of 2.66mnt, a decline of

9.2%yoy. Volumes declined 22.2% MoM .

Jaypee registers growth of 13.2% - slowest growth YTD : Impacted by unseasonable

monsoons in the northern & western region Japyee registered dispatches growth of just

13.2%, which is the slowest growth the company has registered during ytd FY11 (October

FY11 ytd growth at 63%).

Shree posts decline of 7.7% in cement dispatches: Shree cement also disappointed with

its cement dispatches declining by 7.7% for the month.

We spoke to cement dealers across India and these are the key takeaways:

Northern Region

n Demand continues to be weak on account of lack of projects post the common wealth

games activities.

n Prices in New Delhi (constitutes 15% of northern region consumption) have been cut by

Rs10-15 per bag in the last one month. This comes after the price hike which was

announced in October clearly highlighting that demand scenario is yet to pick up so as to

be able to sustain these levels of cement prices.

n Chandigarh and Punjab which also constitute around 15% of northern cement

consumption have seen subdued demand in the month of November. As a result of

which prices have remained at the same levels and any further rounds of price hikes

seem to be ruled out.

n Rajasthan, which has the maximum capacity in the northern region experienced price

pressures as demand continues to lag. Dealers in this region are skeptical about

sustainability of even the current price levels as overcapacity and lower demand

scenario is expected to continue till December.

n Overall, prices in the northern region were under pressure on account of subdued

demand as construction activity was hampered due to spoilers like monsoon and festive

season.

Southern Region

n Demand weakened by monsoons

n Price cuts of Rs10-15 per bag seen across the region. Chennai prices declined to Rs

250-255 levels from their October prices of Rs270/bag

n Tamil Nadu dealers indicated that consumption in the month of November have declined

m-o-m by almost 40%

n Sluggishness expected in prices as monsoons continue to dampen the demand scenario

Central Region

n Prices have declined by Rs5-10/bag this month

n Demand continues to be low as construction activity is subdued due to labor shortage

(on account of harvesting season)

n Sharp discounts by a few cement producers putting pressure on premium brand’s pricing

(like ACC), as they are trading at a 12-16% premium

n Dealers expect sluggishness in prices till mid December, 2010

Eastern Region

n Price cuts of Rs2-5 seen in Kolkata.

n Labor constraints affected the construction activity thereby affecting demand

n Supply from southern region at lower rates exerting pressure on prices in eastern region

n Sluggishness in prices expected till Dec 2010 post which demand supply scenario in this

region could improve.

Western Region

n Prices in Maharashtra and Gujarat remain more or less at the same levels as October.

n Dealers indicate that lower demand might not support any further price hikes.

Outlook- demand growth remains key to sustain cement prices

The current scenario points towards poor demand continuing till mid December and thereby

exerting some pressure on cement prices. Though seasonal logistical bottlenecks (like

additional wagons supply to food grains & crop harvest during next 3-4 months) will provide

some support to cement prices, we believe that sharp pick up in demand growth remains

key to sustain cement prices.

Recommendations

We remain NEUTRAL on the sector. We remain positive on ACC, Grasim & Shree.

ACC: Stock trades USD 110 for its CY11 capacity, valuations though not cheap on absolute

basis, are comparatively attractive (~15% discount to Ambuja Cement). Moreover, we

expect ACC to deliver CY11E RoCE of ~25% (close to 1.5X cost of capital).

Grasim : Strong VSF demand to fuel earnings growth, valuation remain attractive - stock

trades at 40% discount for its holding in Ultratech Cement.

Shree Cement : Current valuation at 4.8x EV/EBITDA and EV/Ton of USD 91, ex value of

power, remain attractive.

Maintain negative stance on India cements and Madras Cement

India cement: Stock is trading at PER 18.8x, EV/EBIDTA of 8.1X and EV/ton of USD75 for

its FY12E numbers. These valuations leave little upside considering that ICL’S FY12 RoCE

at 6.3% is barely half the cost of capital)

Madras cement: Stock trading at 9.8X and EV/ton of USD88 on FY12 numbers leaves

limited upside for the stock. Further estimated FY12 RoCE of 10.9%, is still below the cost

of capital)