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• Pricing recovery q/q, though skewed regionally: Cement prices recovered
q/q, however, South India saw the sharpest price recovery with estimated q/q
price increase of 29%, followed by West India showing a price increase of 5%
q/q. North as per our estimates would show a modest q/q decline, while East
would have a 5% decline q/q. National average cement prices should be up 5%
q/q. While Oct and Nov were relatively strong months for cement prices, we
estimate cement prices saw a modest correction in Dec. Given this back drop,
we expect companies with exposure to South India to show the sharpest q/q
improvement in margins and earnings (though admittedly volumes would still
be low).
• Cost pressures- More to come in the March quarter: We expect cost
pressures to remain elevated, but a large part of the recent imported coal price
increase would flow with a lag for cement companies, with recent spike in coal
only flowing in the March/June quarter. Domestic e-auction coal prices are also
up sharply, adding to cost pressures.
• Grasim- VSF to remain strong; UTCEM to benefit from South India
recovery: We estimate GRASIM undertook Rs8/kg price increase in VSF
through the quarter (from average price of Rs116/kg in Q2), though full benefits
of the price increases would flow in the March quarter. We expect cost pressures
to remain benign in VSF. We expect blended EBITDA/MT for UTCEM to
increase 64% q/q to Rs789/MT mainly on South India price increases.
• ACC and ACEM to have noisy quarters given year end, though underlying
profitability to see improvement: Given that ACC and ACEM both have Dec
year ends, the quarter tends to be noisy, especially with tax rates. However,
underlying profitability should improve, though cement price decline in East
India, should limit EBITDA/MT expansion for ACC, and muted price increase
in North India should do the same for ACEM.
Cement – Off a very weak 2QFY11
We expect earnings for cement players to be significantly better after a very poor 2Q
results, which witnessed low volume and close to trough prices in many markets. 3Q
realizations saw improvement with large hikes in South India (prices were increased
Rs80-90/bag over Sep-Oct) and West India. North India players saw a good start to
the quarter, but prices and volumes declined in November due to festivals and
weather. Average realization is expected to increase 4-8% for the large players.
While volumes in the quarter were lower than our expectation (with a weak Nov and
muted recovery in Dec), dispatches for the large cement players (ACC, ACEM,
UTCEM, Jaypee and Dalmia) increased 11% q/q and 9% y/y. However, costs are
likely to remain elevated with higher coal, fly ash and freight costs in the quarter.
While we expect EBITDA/MT to improve sequentially, they would still be below the
1QFY11 levels for most companies.
Ambuja: The company volume was impacted by the truckers strike in its HP plants
during the quarter. But strong volumes from other plants helped improve volumes by
15% q/q and 5% y/y. We forecast realizations to improve 3.5% q/q. We expect
EBITDA of Rs4.6bn with captive clinker benefits offset by other cost pressures. We
expect Ambuja's PAT at Rs2.7bn.
ACC: We expect strong sales volume growth (16% q/q; 4% y/y) and higher
realizations (+4% q/q) in its key markets of South and West India will help improve
margins. However, higher cost (fly ash, coal and freight) will offset the volume and
pricing gain. We expect ACC’s 3QFY11E EBITDA at Rs4.4bn and PAT at Rs2.5bn.
UltraTech: While we expect UTCEM will see the strong improvement in
realizations (+8% q/q) given the large price increase in South and West India,
volume growth would be much lower (+2.7% q/q) given continued weak demand
trends in South and slower recovery in North. We expect EBITDA of Rs7.4bn and
PAT of Rs3.2bn.
Grasim (consolidated): We expect 3QFY11 EBITDA at Rs11.5bn and PAT at
Rs4.9bn (-31% y/y; +52% q/q). VSF segment should see a much better quarter with
strong volume growth (+20% q/q; flat y/y) and higher VSF prices (+3.5% q/q; +10%
y/y) driving margin expansion. The company took two price increases (Oct and mid-
Nov) given strong cotton prices. We expect margins to increase by ~600bps
sequentially to 39% in the quarter.
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