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UBS Investment Research
India Cement Industry
Not out of the woods yet
„ Weak utilisation should continue in FY12 due to large capacity additions
We expect industry overcapacity to remain until FY12, with utilisation at about
85% (below historical averages) due to large capacity additions. We expect
equilibrium between demand and capacity to be achieved only in FY13. This is
even after we factor in higher demand growth (we estimate FY11/12/13 growth of
10%/12%/12% compared to 10% over FY05-10 and 7.5% in FY11 so far), led by
increased infrastructure spending.
„ Profitability should remain under pressure
We forecast average ROE at below 20% over FY12-13 (around 25% in FY08-10).
Across regions, we expect greater fragmentation due to higher capacity additions
by firms other than the top five of each region. This is likely to impact pricing
power. Rising costs led by higher coal prices could further weigh on profitability.
We think the downside risks to our estimates are higher than the upside risks.
„ Stocks already trading at a premium to replacement costs
With the monsoon period over, the worst for FY11 is likely behind us and we
expect a gradual recovery in the sector. However, cement stocks are already
trading at a premium (15%-30%) to replacement costs (US$115/tonne), and we do
not think the risk/reward is favourable at current valuations.
„ We prefer Grasim Industries the most, India Cements the least
As we are most cautious on the Southern region (which has the highest capacity
additions and fragmentation), India Cements is our least preferred stock in the
sector (we assume coverage with a Sell rating). We also assume coverage of
Ambuja Cement and ACC with Sell ratings. We initiate coverage of UltraTech
Cement with a Sell rating based on valuation. We like Grasim Industries for its
viscose staple fibre (VSF) business and we assume coverage with a Buy rating.
Price target derivations
For Grasim, we value: 1) the cement business using our price target for
UltraTech of Rs1,030 and applying a 10% holding company discount; 2) VSF
business at 5.5x one-year forward EV/EBITDA; and 3) other businesses at 5x
one-year forward EV/EBITDA.
We value UltraTech (Rs1,030.00 price target) on a target one-year forward
EV/EBITDA multiple of 6.5x, in line with other cement companies. We
continue to value ACC (Rs960.00 price target) at a one-year forward
EV/EBITDA multiple of 6.5x. We continue to value Ambuja (Rs130.00 price
target) at a one-year forward EV/EBITDA multiple of 6.5x.
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