Kotak Securities:: Cement India -Weak despatches

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Cement
India
Weak despatches. Cement sector does not seem to be carrying the momentum of
volume growth in October (+17% yoy) in November, as most large cement companies
reported de-growth (-8% yoy) in despatches. We are encouraged by the sharp increase
in cement prices in South during October, though believe that sustenance of current
prices may be difficult in the absence of demand growth. We recommend reducing
positions in Ambuja and ACC, which are trading at rich premium to replacement cost.




Demand uptick in October does not seem to sustain
Post a subdued monsoon quarter, the month of October witnessed a significant rebound in
cement volumes with a strong 17% yoy growth in Industry despatches driven by a large pent-up
demand in the system due to a prolonged monsoon with limited dry period. However, headline
despatch numbers for the month of November indicate that volumes do not seem to be sustaining
the momentum—as large cement players like Ultratech and Ambuja reported de-growth in
despatches, while ACC and Jaiprakash reported a more muted volume growth.

Our volume estimates assume a 11% yoy increase in 2HFY11E compared to the near-stagnant
volume growth reported in 1HFY11 (for companies under our coverage), and we do see downside
risk to our volume assumptions based on despatch numbers reported so far.

Cloud cover lifts – prices in South spike, only to re-trace some gains
Average cement prices increased by Rs20/bag across the regions led by South India where average
prices increased by Rs42/bag, a likely effect of sharp price hike in the month of September. We,
however, note that the price increase comes on the back of a sustained period of weakness and
barring South India, prices in rest of India are only marginally better than 2QFY11 (see Exhibit 2).
As per media reports (and corroborated through channel checks), cement prices have been cut by
Rs10-15/bag over the last fortnight, as price increases taken previously were not supported by
revival of demand.

Sustenance of current price increases remains a key
Cement stocks have outperformed the Sensex in the last three months and are trading at a
significant premium to replacement cost (US$120/ton). We maintain our cautious stance on the
sector and reiterate SELL on expensive names such as Ambuja Cement (7.7X CY2011E EBITDA)
and ACC (6.7X CY2011E EBITDA). We continue to like Shree Cements and Grasim Industries
primarily on account of relatively inexpensive valuations as compared to peers.