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CEMENT SECTOR
Near term outlook positive on price hikes; maintain cautious
outlook on long term
q Our recent dealer interactions indicated that cement prices continue to
rise on supply discipline
q However, demand continued to remain below estimates
q We further downgrade our demand estimates following low dispatch
growth seen since Dec end.
q Cost pressures continued to remain high during Q3FY11; however due to
price hikes, margins may improve sequentially.
q We maintain our cautious stance on the sector, though recent price increase
may positively surprise on sequential quarterly numbers.
Key highlights about the sector
Cement demand growth continued to lag our estimates
Cement demand continued to grow below our estimates till Jan, 2011 and demand
growth in the current fiscal till Jan, 11 stood at just 4.1% vs our estimate of 7.6% for
the full year. We had expected demand to recover during Q4FY11 but lack of construction
activity and issues related to sand availability continued to impact overall
demand growth. We believe that lower than expected demand growth would exacerbate
the demand supply scenario towards higher supplies which would put pressure
on cement prices and capacity utilizations.
We thus revise our demand growth estimates for FY11 and expect demand to grow
by 5.2% in FY11 as against our earlier estimate of 8% growth for FY11. We expect
demand to improve by 10% in FY12.
Cement prices hiked on supply discipline
Cement prices have been hiked in different regions on supply discipline. Our recent
interactions with dealers indicate that companies have drastically reduced sales from
the non-trade segment in the month of Feb. This has resulted in pushing demand in
the trade segment and hence the sharp price hikes. We present below the trend in
the cement prices after Dec, 2010
These price hikes have come on account of supply cuts in the markets which was
reflected in the capacity utilizations of the cement companies. Capacity utilization of
cement companies in Jan, 2011 in southern region has dropped to nearly 61% (vs
72% in Jan, 2010) while northern region has also witnessed decline in capacity utilizations
to 78% (vs 90% in Jan, 2010). This was primarily on account of lack of
demand as well as supply cuts being incorporated by cement players.
Results for Q3FY11 disappointed on volumes and cost front
Performance of cement companies during Q3FY11 was impacted by lower than expected
dispatch growth coupled with rising costs. Costs continued to remain high
due to higher coal prices which translated into escalated power and fuel cost.
Freight expenses also remained high due to increase in the freight rates as well as
lead distances. However, operating margins improved on a sequential basis due to
better cement realizations.
Going ahead, on a sequential basis, we expect margins to improve from the lows
seen earlier in 9MFY11 primarily on account of improvement in cement prices with
costs pressures expected to remain high. We also expect operating margins to improve
slightly in FY12 in comparison with FY11.
Recommendation
We believe that demand-supply gap will continue to remain wide for next 1.5-2
years due to large capacity additions seen in last 2 years along with additions expected
going ahead. Cost pressures are also likely to remain high due to higher coal
prices as well as freight costs. Though cement prices have been hiked in the recent
past due to supply discipline as well as mounting cost pressures, sustainability of
price hikes looks difficult in the absence of real demand growth.
We had expected demand to improve from Q4FY11 onwards which has not happened.
However we expect demand growth to improve in FY12 with onset of
project award activity in full swing but we believe that demand growth will not be
sufficient to absorb surplus capacity. We thus continue to maintain our cautious
stance on the sector and would only recommend players which are available at attractive
valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CEMENT SECTOR
Near term outlook positive on price hikes; maintain cautious
outlook on long term
q Our recent dealer interactions indicated that cement prices continue to
rise on supply discipline
q However, demand continued to remain below estimates
q We further downgrade our demand estimates following low dispatch
growth seen since Dec end.
q Cost pressures continued to remain high during Q3FY11; however due to
price hikes, margins may improve sequentially.
q We maintain our cautious stance on the sector, though recent price increase
may positively surprise on sequential quarterly numbers.
Key highlights about the sector
Cement demand growth continued to lag our estimates
Cement demand continued to grow below our estimates till Jan, 2011 and demand
growth in the current fiscal till Jan, 11 stood at just 4.1% vs our estimate of 7.6% for
the full year. We had expected demand to recover during Q4FY11 but lack of construction
activity and issues related to sand availability continued to impact overall
demand growth. We believe that lower than expected demand growth would exacerbate
the demand supply scenario towards higher supplies which would put pressure
on cement prices and capacity utilizations.
We thus revise our demand growth estimates for FY11 and expect demand to grow
by 5.2% in FY11 as against our earlier estimate of 8% growth for FY11. We expect
demand to improve by 10% in FY12.
Cement prices hiked on supply discipline
Cement prices have been hiked in different regions on supply discipline. Our recent
interactions with dealers indicate that companies have drastically reduced sales from
the non-trade segment in the month of Feb. This has resulted in pushing demand in
the trade segment and hence the sharp price hikes. We present below the trend in
the cement prices after Dec, 2010
These price hikes have come on account of supply cuts in the markets which was
reflected in the capacity utilizations of the cement companies. Capacity utilization of
cement companies in Jan, 2011 in southern region has dropped to nearly 61% (vs
72% in Jan, 2010) while northern region has also witnessed decline in capacity utilizations
to 78% (vs 90% in Jan, 2010). This was primarily on account of lack of
demand as well as supply cuts being incorporated by cement players.
Results for Q3FY11 disappointed on volumes and cost front
Performance of cement companies during Q3FY11 was impacted by lower than expected
dispatch growth coupled with rising costs. Costs continued to remain high
due to higher coal prices which translated into escalated power and fuel cost.
Freight expenses also remained high due to increase in the freight rates as well as
lead distances. However, operating margins improved on a sequential basis due to
better cement realizations.
Going ahead, on a sequential basis, we expect margins to improve from the lows
seen earlier in 9MFY11 primarily on account of improvement in cement prices with
costs pressures expected to remain high. We also expect operating margins to improve
slightly in FY12 in comparison with FY11.
Recommendation
We believe that demand-supply gap will continue to remain wide for next 1.5-2
years due to large capacity additions seen in last 2 years along with additions expected
going ahead. Cost pressures are also likely to remain high due to higher coal
prices as well as freight costs. Though cement prices have been hiked in the recent
past due to supply discipline as well as mounting cost pressures, sustainability of
price hikes looks difficult in the absence of real demand growth.
We had expected demand to improve from Q4FY11 onwards which has not happened.
However we expect demand growth to improve in FY12 with onset of
project award activity in full swing but we believe that demand growth will not be
sufficient to absorb surplus capacity. We thus continue to maintain our cautious
stance on the sector and would only recommend players which are available at attractive
valuations.
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