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Cement 3QFY11 preview
Prism Cement (3mtpa operational capacity in central India) reported weak 3Q
results as its cement Ebitda declined 75% YoY with margins at Rs200/t. We
expect weak quarter for our coverage as well due to modest volume growth
and pricing pressures along with higher costs. While seasonality should
benefit and margins should improve sequentially, aggregate Ebitda for our
universe would still contract 18% YoY. Post Prism results, we however see
downside risks to our current estimates; potential consensus downgrades
would be negative catalyst for the stocks. Retain Underweight on the sector.
‰ Weak 3Q results by Prism: Prism Cement (PRSC IN) reported a 76% YoY decline
in its cement Ebitda despite a 15% YoY rise in volumes. Cement realisations
declined 13% YoY/6% QoQ due to demand-supply imbalance; costs also rose 18%
YoY/ 3%QoQ. While seasonal factors like higher volumes, lower costs
(maintenance expenses in 2Q) etc. helped QoQ comparison, Ebitda margins
remained under pressure and came in at Rs200/t (-79% YoY/+284%QoQ).
‰ Building in higher realisations: Cement prices were volatile in most regions in
the last six months and 2Q witnessed sharp declines, particularly in south India.
Interactions with the dealers indicate that there had been an improvement in
pricing from Sep/Oct before pricing pressures started again in Dec-10. Prices in 3Q
were particularly firm in south India where supplies to the market were restricted
as players lowered the utilisation rates while average prices were 1-5% lower in
north/central. We therefore expect average realisations to rise 3-10% QoQ for pan
India players and build in a 24% improvement for India Cements (south) and build
in almost flat QoQ realisations for Shree (north).
‰ Weak demand growth: Industry reported a weak 3.3% YoY growth in
despatches during 3Q; divergent trend however was visible for our coverage as
ACC reported a 7% YoY increase in despatches on the back of new capacities while
India Cements reported a 23% decline as industry in south resorted to production
discipline. Shree Cement reported a 4% decline while Ambuja and UltraTech
reported a 2-5% YoY increase.
‰ Higher costs to impact from 4Q: 2Q unit costs are typically higher for cement
companies due to seasonal factors like lower volumes, maintenance expenses (due
to plant shutdown) etc. An uptick in imported coal prices would impact, though,
higher volumes as well as lower maintenance expenses should help and we model
in almost flat costs QoQ. We also highlight that while imported coal prices rose
~12% QoQ, inventory carry-over would partially delay the impact to 4Q.
‰ Seasonality driving prices recently: Newsflow has picked up again on cement
price hikes and our interactions with dealers indicate that prices, across regions,
have moved up by 3-12% in the last two weeks. We however note that this is
driven by seasonality as construction activity picks up from January (post
monsoons). Dealer feedbacks also indicate that there is caution on pricing as
demand continues to be sluggish while supply pressures have been rising
impacting demand-supply imbalance. We also note that input costs have been
trending up, particularly energy costs; for example, current imported coal prices
are 25% higher than the 3Q average. Impact of cement price hikes would get
partially offset against rising costs.
‰ Maintain cautious sector stance: We expect supply pressures to continue which
would keep prices depressed for the next 5-6 quarters. We retain our cautious
sector stance and remain negative on ACC, Ambuja, India Cements, UltraTech.
Grasim is our only relative bet in the sector.
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