CEMENT Demand growth disappoints leading to price cuts: Q3FY11 Result Preview: Edelweiss

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CEMENT
Demand growth disappoints leading to price cuts: Q3FY11 Result Preview: Edelweiss


􀂄 Key highlights of the sector during the quarter
Cement prices remained weak for the major part of 3QFY11 (with the exception of
South, where prices held firm even in the absence of demand growth). During the
quarter, highest price correction was witnessed in the East region (drop of ~5%
QoQ) while higher prices in South, kept the West region insulated from significant
downfall. Prices remained weak as the industry demand failed to meet the
expectations of companies. Though October 2010 saw record growth in industry
despatches (up 18% YoY), November 2010 saw a 2% YoY decline. Industry
despatches for December 2010 are estimated to remain flat, leading us to an
industry growth of 5% YoY for 3QFY11 as well as YTD (Apr-Dec 2010). Nonavailability
of labour due to festive season and extended monsoon in parts of
country along with sand non-availability issues in some regions (mainly West)
kept the overall demand subdued in 3QFY11.

􀂄 Result expectations for the sector and stocks under coverage
Depending on the sales mix, the average realisations for companies are estimated
to increase in the range of 0.5% to 6.6% QoQ for pan India players. Regional
players like India Cements are however estimated to report a ~20% increase in
realisations on the back of sharp bounce back in cement prices in South.
Realisations of Ambuja Cements are estimated to be flat QoQ due to no exposure
to South and high exposure to East (26%).
We estimate EBITDA margins to decline across all companies in the range of 100-
600 bps Y-o-Y due to increased costs and lower realisations. PAT too is estimated
to decline across companies in the range of 19% to 45% YoY.
􀂄 Outlook over the next 12 months
With demand expected to pick up in the busy season 4QFY11, we expect near
term uptick in cement prices from the current low levels (due to declines in
3QFY11). But the prices are unlikely to get back to their peaks seen in the last
fiscal and will broadly remain under pressure in FY12 due to ramp up in utilization
levels of new capacities and further capacity expansion. Like FY11, if the demand
growth continues to disappoint in FY12, prices can see levels witnessed by the
industry during 2QFY11. We maintain our negative view on the sector
􀂄 Recommendations
Top picks: Grasim Industries.