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CEMENT
During Q3FY11, cement demand continued to grow at a sluggish pace and
price also remained under pressure due to lack of demand as well as impact
of incremental supplies. Price declines have been witnessed in key regions
such as North and West during November and December, however decline
was limited in southern region due to supply and pricing discipline being
exhibited by southern players.
Overall costs for the sector continued to remain high during the quarter
due to higher freight costs as well as power and fuel costs. Cement dealers
have indicated that cement prices may be hiked by another Rs 10 per bag
soon as it has happened in western region primarily due to cost push
factors. However, sustainability of price hikes continues to remain a
question. Inline with our expectations, cement price hikes incorporated in
the months of Aug-Sep, 2010 could not sustain in Nov-Dec, 2010 and going
forward also, we expect the same.
We thus continue to maintain our negative stance on the cement sector
and would prefer only those players which are available at attractive
valuations such as Grasim and Shree Cement. We continue to maintain our
REDUCE stance on ACC, Ultratech and India Cements.
Key highlights during Q3FY11
Demand growth lower than our estimates
Cement demand growth YTD (till Nov, 2010) stands at just 5.5% which is much
lower than our estimates. Demand growth till now has been impacted by lack of
construction activities, labor as well as sand shortage, extended monsoons and extreme
winter witnessed in key regions. Based on lower than expected demand in
9MFY10, we expect demand in FY11 to be lower than FY10 and hence expect it to
grow by 7.6% in FY11.
However with improvement in the construction activity, we expect cement demand
to witness an improvement during Q4FY11. We also expect demand growth to
improve to 10% going forward for FY12.
Prices continued to remain under pressure
Cement prices continued to remain under pressure during Nov-Dec, 2010 and
could not sustain the hikes incorporated during Sept-Oct, 2010. Due to pricing disciple
being observed by players in southern region, net realizations for the companies
are expected to improve sequentially during Q3FY11 while it is expected to
witness a decline on yearly basis.
Margins will continue to remain under pressure, though they
may improve sequentially
Operating margins of cement companies are expected to remain under pressure
due to continued cost hikes primarily led by higher freight, power and fuel and raw
material cost. EBITDA/tonne for companies is expected to range between Rs.500 to
Rs.750 per tonne.
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