Cement -Offtake improves in January – Prices hiked across regions:: Emkay

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Cement Sector

Offtake improves in January – Prices hiked across regions

n     Pick up in construction activities post festive season drives improved cement offtake in January - supply constraints fuel price hike of Rs10-15/bag across regions

n     Int’l coal prices up 53% (USD128/ton) over last 3 months, led by Australian floods. Full impact to be visible in Q4FY11-industry needs to sustain price hikes to protect margins

n     Sustainability of cement prices remains uncertain as the cement demand growth FY11YTD ~5% has now emerged as bigger concern than the overcapacity in the system

n     Maintain our NEUTRAL stance on the sector. Maintain negative stance on, Ultratech, Ambuja Cement, India cements and Madras Cement, remain positive on ACC & Grasim

Valuations & Recommendations 

			PE(x)
Company Name	Reco	TP (Rs)	FY10	FY11E	FY12E
ACC	Accumulate	1,035	11.9	16.6	14.2
Ambuja Cements	Hold	130	16.0	15.4	14.1
Grasim Industries	Accumulate	2,730	8.1	12.1	10.4
Ultratech Cement	Reduce	1,040	11.8	18.8	15.6
India Cements	Sell	114	9.6	27.1	16.7
Madras Cements	Reduce	113	7.6	11.8	9.8
Orient Paper	Buy	77	5.8	7.5	5.5
Shree Cements	Accumulate	2,330	8.3	18.2	12.3
Average			9.9	15.9	12.3

	EV/EBITDA (X)			EV/tonne (USD)
Company Name	FY10	FY11E	FY12E	FY10	FY11E	FY12E
ACC	7.0	9.4	7.4	144	122	112
Ambuja Cements	9.7	9.2	7.9	158	152	134
Grasim Industries	3.6	4.5	4.0	0	0	0
Ultratech Cement	6.4	9.5	8.1	120	132	127
India Cements	5.7	9.9	7.4	77	79	69
Madras Cements	6.0	7.3	6.3	104	91	88
Orient Paper	4.5	4.9	3.4	54	49	38
Shree Cements	4.2	6.2	4.6	121	89	73
Average	5.9	7.6	6.1	97.1	89.2	80.2

 Cement offtake improves in January – Prices hiked across regions

Our recent interaction with cement dealers across India suggest that the cement offtake

has improved in January as compared to last couple of months. Improved offtake and

supply constraints led by shortage of railway wagons has helped cement companies

raise price by Rs10-15/bag across regions, except for Tamilnadu. We believe that

though the cement offtake has improved in the month of January, we would like to

highlight that the monthly dispatches are unlikely to witness a double digit growth on

account of high base (January 2010 all India cement dispatches grew by 12.7%).

The improved January offtake scenario is showing first signs of the much awaited

improvement in cement demand. 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 over the busy construction season, we believe that sharp pick

up in demand growth (10%+) remains key to sustain cement prices over longer term.

On the cost front international coal prices have averaged USD104/ton for Q3FY11 (+

55% yoy) and this will fully reflect in Q4FY11. With coal prices remaining on an uptrend

and other costs pressures reluctant to recede, the industry would need to sustain recent

prices hikes to protect its margins. Maintain our NEUTRAL stance on the sector.

Maintain negative stance on, Ultratech, Ambuja Cement, India cements and Madras

Cement. Remain positive on ACC & Grasim.

Regional cement demand & price trend

Northern Region

Post harvesting season, demand is expected to grow in this region as construction activities

start gaining some momentum in the coming weeks.

Price hikes have been announced across the region, except Punjab and Amritsar due to

harsh winter conditions. Prices in New Delhi are hiked by Rs10/bag in Trade and Rs20/bag

in non trade as demand shows signs of recovery. In Jaipur demand continues to be

subdued, however, cement producers have made announcements of Rs5-8/bag price hike.

Western Region

Cement demand in the region though has picked up as compared to November; the region

is still to witness the peak levels of offtake typically seen in the construction season. Also

the construction activity continue to remain affected by shortage of sand (due to Govt

restriction), an important construction material.

Though the region is yet to witness peak level of offtake, cement prices in Mumbai has

been hiked twice in the month of January with total hike of Rs8-10/bag. Supply constraints

affected first by Gujjar agitation and now by wagon shortage has helped companies to hike

prices by Rs10/bag in other parts of Maharashtra.

Southern Region

Post the festive season Tamilnadu & some pockets of Karnataka are witnessing some

increased offtake. However Demand scenario in Andhra Pradesh continues to be weak as

uncertainty over the Telangana issue prevails.

Despite weak demand, cement prices have been hiked by Rs10/bag in Hyderabad effective

from 18th Jan. Prices in TamilNadu remains by and large flat at December levels. However,

with pick up in demand, expected in a week’s time dealers expect price hike of Rs10/bag by

the end of this month. Bangalore market has seen roll back of discounts of Rs10-15/bag

which were given till the end of last month.

Central Region

The region is witnessing mixed demand signals with key centers like Bhopal witnessing

improved demand while centers like Lucknow still to see any significant pick up. However

we would like to highlight that the Lucknow region is witnessing some supply constraints led

by logistical bottlenecks.

Price hikes have been announced across the central region with the expectation of better

demand growth. Prices of cement in Lucknow have gone up by Rs15-20/bag in January

mainly due to some supply constraints in the system. Prices in Bhopal have been increased

by Rs8-10/bag in the month of January on the back of better pick up. With positive demand

growth expected in the coming months dealer expect price to remain firm and could also

see hike of Rs8-10/bag in the month of February.

Eastern Region

After a lull of months, cement demand in the eastern region is showing encouraging signs

led by higher offtake from non trade (institutional & contractor) segment. However the trade

demand (Retail & individual housing demand) is yet to pick up significantly.

After a sharp fall of Rs20-25/bag in Nov & Dec, Cement prices in Kolkata and adjoining

region have been hiked by Rs10/bag. In fact national level players like ACC etc have hiked

prices by Rs14-15/bag. Prices in Guwahati remain at December levels; however national

level players are expected to hike prices by Rs10/bag in next week.

Outlook- demand growth remains key to sustain recent cement price hikes

n We believe that sustainability of cement prices remains uncertain as the cement demand

growth FY11YTD ~5% has now emerged as bigger concern than the overcapacity in the

system. If cement demand growth remains muted over next 6-9 months we see cement

prices softening and thereby posing a downside risk to our earnings estimate.

n The improved January offtake scenario is showing first signs of the much awaited

improvement in cement demand. 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 over the busy construction season, we believe that sharp pick

up in demand growth (10%+) remains key to sustain cement prices over longer term.

n On the cost front international coal prices have averaged USD 104 for Q3FY11 (+ 55%

yoy) and this will fully reflect only in Q4FY11. With coal prices remaining on an uptrend

and other costs pressures reluctant to recede, the industry would need to sustain recent

prices hikes to protect its margins. Maintain our NEUTRAL stance on the sector.

Maintain negative stance on, Ultratech, Ambuja Cement, India cements and Madras

Cement, remain positive on ACC & Grasim.