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Tepid demand weighs on volume growth…
Cement majors posted subdued volume growth
The total cement volume is expected to grow by ~5.3% YoY in December
2010 as the six major companies, holding ~50% of the total cement
capacity, reported a 5% increase in dispatches for the month. On an MoM
basis, the overall volume of the six companies was up ~21%. The
positive growth during the month came on the back of marginal growth in
cement demand from the infrastructure segment as the monsoon season
is nearing its end.
Among majors, except Shree Cement, all players reported growth in
dispatches on a YoY basis. JP Associates and JK Lakshmi clocked a
double digit growth of 27% and 18% YoY, respectively, in volumes. ACC
and Ambuja Cement reported muted growth of 2% and 6% YoY,
respectively, in volumes while UltraTech (including Samruddhi) reported
flat sales in December. However, on an MoM basis, UltraTech and Ambuja
Cement reported ~23% and ~30% growth in dispatches, respectively.
Dispatches of Shree Cement and JK Lakshmi Cement clocked ~28% and
~18% MoM growth, respectively.
YTD volume growth at ~5%, FY11E growth expected at ~7%
Total cement volume growth of the industry during April-December 2010
is expected at 5% YoY as against an annual growth rate of ~10% in FY10.
The muted YTDFY11 growth was on account of the long monsoon season
when the industry reported 2-3% growth in dispatches during JuneAugust 2010. However, we expect ~7% growth for FY11E as
consumption is likely to increase in January 2011.
Cement prices update
Cement prices across regions witnessed a correction of | 5-10 per bag in
the wake of weak cement demand, labour crunch and delay in
commencing of new projects due to monsoon. Cement prices in Delhi
declined | 10 per bag to | 210 per bag in December 2010 from | 220 per
bag in November 2010. Prices have corrected ~13% from the high of |
240 per bag in April 2010. The eastern region also witnessed some price
correction as cement prices in Kolkata declined by 3% or | 8 per 50 kg
bag to | 242 in December 2010 from | 250 in November 2010. In the
western region, prices in Mumbai have shown weakness as price per bag
declined by | 5 per 50 kg bag to | 252 per bag in December 2010 from |
257 per bag in November 2010. Cement prices in Hyderabad decreased
by around 4% MoM to | 216 per bag while cement prices in Chennai
surged by 5.5% MoM to | 265 per bag after a pick-up in cement demand.
Capacity utilisation improved to 81% in Dec’10 against 68% in Nov’10
Capacity utilisation of the industry increased to ~81% in December 2010
as against ~68% in November 2010. Growth in utilisation can mainly be
attributed to marginal growth in cement demand from the infrastructure
segment after the long lasting monsoon season. However, the utilisation
rate for YTD FY11 stood at 75% as against 87% in FY10.
Demand to pick up after monsoon in northern region
Cement prices in Delhi declined by | 10 per 50 kg bag to | 210 per bag in
December 2010 from | 220 per bag in November 2010. Prices have
corrected by ~13% from the high of | 240 per bag made in April 2010. On
a YoY basis, prices are down by ~9% or | 20 per bag. Besides, price
sustainability in Rajasthan is expected to be doubtful till the end of this
year as the region is suffering from overcapacity and lower demand.
Overall, cement prices in the northern region were under pressure due to
shrinking demand from government and real estate projects. However,
we expect a revival of cement demand in January 2011 due to the end of
the monsoon season and pick-up in construction activity.
Construction activity to drive cement demand in eastern region
Cement prices in Kolkata and other parts of the eastern region saw a
correction of | 8 per 50 kg bag to | 242 in December 2010 from | 250 in
November 2010. The erosion in prices can be mainly attributed to the
festival season and manufacturer price hike per bag in November that was
not absorbed by the market. Going forward, prices have corrected by
~17% from the high of | 293 per bag made in April 2010. On a YoY basis,
prices are down ~3% or | 8 per bag. We expect a revival in cement
demand in January 2011 due to the end of the monsoon season and pickup in construction activity.
Tepid demand growth weigh on cement dispatches in West
Cement prices in the western region remained weak for the month as the
price per bag declined by | 5 per 50 kg bag to | 252 per bag in December
2010 from | 257 per bag in November 2010. Prices have corrected by
~6% or | 15 per bag from the high of | 267 per bag made in April 2010.
However, prices were up ~1% or | 2 per bag on a YoY basis. The fall in
cement prices can mainly be attributed to muted demand growth post
monsoon and shortage of sand in Maharashtra. However, cement prices
in Gujarat are looking stable with a slight upward movement in November
December as compared to November 2010. We expect a revival of
cement demand in January 2011 due to the end of the monsoon season
and pick-up in construction activity.
Mixed outlook in Southern region
Cement prices in Hyderabad decreased around 4% MoM to | 216 per bag
after the artificial hike in prices was not absorbed by the market on
account of weak demand. Prices have decreased by | 9 per bag from |
225 per bag in November 2010 to | 216 per bag in December 2010.
However, prices are still higher by ~44% in Hyderabad on a YoY basis
from its low of | 150 per bag. On the other hand, cement prices in
Chennai inclined by 2% MoM or | 5 per bag to | 265 after marginal
growth in cement demand. Prices have increased by ~20% YoY or | 45
per bag from its low of | 220 per bag in December 2009.
Industry outlook
After posting negative growth of 5.4% in November 2010, overall growth
is expected to increase by 5.3% in December 2010. The overall dispatch
of the major six companies, who contribute ~50% of the total capacity of
the Indian cement industry, has increased by ~5% during the month. Our
expectation of 5.3% growth for the industry in December is based on the
assumption that the other players contribute the rest 50% of the total
industry and would have operated at the utilisation level of 81%, the rate
at which the six players have operated. We expect cement consumption
to grow by ~7% for FY11E as against ~10% in FY10.
For FY11E, the capacity utilisation rate is expected to come down to 78%
from 87% in FY10 as we expect ~44 MTPA of effective capacity addition
during the year as against ~14 MTPA of incremental demand. Cement
prices are likely to remain under pressure for the next two quarters on
account of demand supply mismatch led by huge capacity surplus of ~58
MTPA in FY11E.
However, utilisation rates are expected to improve to 82% in FY12E on
account of lesser capacity addition during the year compared to an
increase in demand. We expect effective capacity addition of ~13 MTPA
as against ~21 MTPA of incremental demand.
The central and eastern markets were least impacted by the demand
supply mismatch on account of robust growth and few capacity additions.
The southern and western markets were most affected due to huge
capacity additions and muted demand growth. Among our cement
coverage universe, we recommend Shree Cement, JK Cement, JK
Lakshmi Cement, Orient Paper and Mangalam Cements on account of a
better market mix and cheap valuation as these stocks are trading at a
steep discount of 50-60% to the replacement cost of $125 per tonne.
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