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Cement
Dispatches up 7.5% yoy
In 3QFY2011, all-India dispatches grew 7.5% yoy compared
to the 3.7% yoy growth recorded in 2QFY2011. Dispatches
increased by a robust 18.5% yoy in October 2010 due to the
cessation of monsoons and on account of inventory build-up in
anticipation of price hikes by the dealers. However, the
momentum could not be sustained in November due to labour
shortage on account of the festive and harvest seasons, decline
in demand from the infrastructure sector and unavailability of
sand in the southern region due to heavy rainfalls. Going ahead,
we do not expect a major growth in dispatches over the next
few months due to the high base effect in the northern region
and continuing political instability in the southern region.
However, the central and western regions are expected to
perform slightly better due to increase in government spending
on infrastructure.
Performance of top players
During October and November 2010, Jaiprakash Associates
continued to remain the top-performer with respect to dispatch
growth, posting a 38.9% yoy jump in sales volumes to 2.4mn
tonnes (1.8mn tonnes) on the back of substantial capacity
addition. ACC reported a 9.3% yoy growth in dispatches to
3.7mn tonnes. Ambuja Cements' dispatches grew by a modest
5.1% yoy to 3.2mn tonnes.
Price situation
Cement manufacturers hiked prices by `15-20 per bag across
the country towards mid-October post the two rounds of price
hikes carried out in the southern region in September. The price
hike was carried out against the norm of keeping prices
unchanged during Dusshera and Diwali. However, the price
hikes carried out in October 2010 did not last long as poor
demand and surplus capacity exerted pressure on the prices.
Hence, since mid-November prices have started to trend
downwards. Further, increase in the costs of other construction
inputs such as steel, sand and gravel has slowed down the
construction activity. Efforts by the cement manufacturers to bring
in pricing discipline have not been very successful, as it did not
get much support from players like ACC and Ambuja with
year-end obligations. The prices were also brought down due
to the government intervention in Tamil Nadu.
Southern region: In the south, the price decline was highest in
Tamil Nadu, which has been facing weak demand due to
unavailability of sand on account of rains. The prices in Chennai
have fallen from around `260/bag in the beginning of
November to `230/bag currently. Further, during the quarter,
the cement manufacturers in Tamil Nadu reduced the prices
after the state government asked for a price cut. The prices fell
in Karnataka due to low demand and increased dispatches
from Andhra Pradesh due to the price differential between the
two states. In Bangalore, the price per bag is currently ruling at
`255/bag, down from `275/bag in November. In Andhra
Pradesh, the prices have not corrected much, but continue to
be the lowest in the region, with average prices at around
`220/bag in Hyderabad.
Northern region: The prices have declined in the northern region
due to low demand. In Delhi, the prices have fallen from
`230/bag towards mid-November to `200/bag currently. The
prices in other areas like Amritsar and Ludhiana have also fallen
and stand at ~`250/bag currently. Efforts to bolster the prices
in the region during the first week of December through
curtailment of dispatches did not succeed as the Holcim group
companies did not participate due to year-end obligations.
Western region: The cement prices have corrected in most
parts of Maharashtra. In Mumbai, the prices have declined by
~`10/bag to `230/bag currently. In Gujarat however, the prices
have sustained at mid-November levels despite weak demand
owing to supply constraints faced by some companies.
Eastern region: The region experienced weak demand and
higher inventory levels in some areas, resulting in price correction
since November. The prices have declined by `10-25/bag. In
Kolkata, the prices have declined from `240/bag to `230/bag
currently. Similarly, in Bhubaneshwar, the prices have corrected
by `20 to `215/bag.
Central region: Weak demand coupled with increased supply
in some cities has led to price correction of ~`20-25/bag in
the region. In Lucknow, the prices are down from `230/bag to
`210/bag. The prices in Bhopal have declined to `185/bag.
All-India capacity to increase by 28mt in FY2011
In FY2010, all-India cement capacity stood at 267mtpa. In
FY2011, the country's cement capacity is expected to increase
by 28mt and touch 295mt by the end of the fiscal. YTD FY2011,
capacity has been augmented by ~12mtpa. Going ahead,
ACC's 3mtpa plant in Chanda is expected to get operational
by 4QFY2011. JP Associates is also expected to increase capacity
by ~3.0mtpa spread across two locations during 4QFY2011.
Capacity utilisation
The all-India capacity utilisation picked up slighlty during
3QFY2011 and increased to 78.5% from 77% in 2QFY2011
on the back of better demand. Overall, utilisation levels are
expected to record moderate improvement to 79.5% in FY2011.
Coal prices surge
The global spot coal prices were substantially higher on a yoy
basis during the quarter. Average prices of the New Castle
Mckloksey 6,700kc coal stood at around US $104/tonne in
3QFY2011 as against US $77/tonne in 3QFY2010. The coal
prices stood higher by 10.6% even on a qoq basis. The rise in
the coal prices is expected to result in higher power costs for
the cement manufacturers during the quarter.
Key developments
ACC: During the quarter, the Holcim group, the promoters of
ACC, acquired an additional 2.01% stake in the company. Post
this deal, Holcim's stake in ACC now stands increased at 48.1%.
This deal once again raised expectations of a merger of ACC
amd Ambuja Cements (Holcim holds 45.58% stake in Ambuja).
Ambuja Cements: Dispatches from the company's Suli and Rauri
plants in Himachal Pradesh were affected by the transport strike.
The strike which began in the first week of October lasted till
November 22. To off-set this fall in supply, the company utilised
built-up inventory and increased output from the other plants.
India Cements: Subsidiary, Indo-Zinc, commenced operations
at its 1.5mtpa green-field plant in Rajasthan during 3QFY2011.
This plant has begun supplies to the central and western regions.
Cement stocks - Performance on the bourses
During 3QFY2011, the cement stocks under our coverage except
Ambuja underperformed the Sensex, with Jk Lakshmi Cement
(JK Lakshmi) being the biggest loser with negative returns of
15.2%.
Cement to report flat performance in top-line
Dispatches of the companies in our universe are expected to
rise marginally by 3.3% yoy during the quarter under review.
We expect the pure cement players are to report flat performance
on the top-line front primarily due to the decline in realisations.
Operating profit is expected to decline by 33.9%
Amongst the pure cement players, we expect Ambuja Cements
to post top-line growth of 3.4%. However, the other major
pure cement players are expected to post de-growth in
top-line. Madras Cements, predominantly a south-based player,
is expected to report highest top-line decline of 13.3%.
Operating margins to fall
Operating margins are expected to decline substantially during
the quarter. The decline in margins can primarily be attributed
to the substantial reduction in realisations and increase in the
cost of inputs such as coal and limestone. JK Lakshmi is set to
record the higest decline in OPM by 1,070bp during the quarter.
Valuation
Going ahead, we expect demand to pick-up in 4QFY2011,
leading to marginal price increase. However, the industry would
remain bogged down due to over-capacity. We maintain our
Neutral view on large cap cement players like ACC, Ambuja
and UltraTech. We remain positive on India Cements, Madras
Cements and JK Lakshmi due to attractive valuations (on EV/
tonne basis) and maintain a Buy on these stocks.
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