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Cement
India
Absence of volume growth disconcerting. Cement companies under coverage
reported improved profitability backed by resurgent prices and stable input costs,
however, we remained concerned about the absence of volume growth (4.3% YTD).
We continue to maintain our cautious stance on the sector, as current price levels may
be difficult to sustain in the face of sluggish demand growth and, correspondingly, a
widening demand-supply gap. Maintain SELL on Ambuja Cement and India Cement.
Pricing (and profitability) improves, volumes muted
As highlighted in our preview dated January 5, 2011, 3QFY11E: Pricing improves, volumes lag,
cement companies reported a significantly better operating quarter (vis-à-vis 2QFY11) which saw
profitability improving 49% sequentially for our coverage universe, driven by strengthening
cement prices across India (much more pronounced in South India) and a temporary abatement in
input cost inflation (1% qoq). However, the benefit of improved profitability was lost to sedate
volume growth with our coverage universe registering a 2% yoy decline as overall cement demand
remained weak during the quarter. Demand in South India was worst hit as reflected in a 26% yoy
decline in ICEM’s volumes.
Supply overhang magnifies in the absence of volume growth
We remain cautious on the business environment (despite recent strength in cement prices), as the
absence of volume growth (4.3% YTD) worsens the demand-supply mismatch. Cement volumes
continue to remain muted with industry sales in months November and December registering a
yoy decline of 6% and 3% with South India being worse off with estimated decline of 19% and
20% during the same period. Besides the absence of volume growth and pricing pressures,
cement companies will likely have to grapple with higher input cost—as rising prices of imported
coal and crude will further sap into the profitability of cement companies.
Sustaining prices remains a challenge; valuations less expensive now
Large cement companies are trading at replacement cost (US$120/ton) after recent under
performance. We reiterate our cautious stance on the sector given limited signs of any
improvement in overall industry macro as it continues to be plagued by subdued demand, lower
utilization levels and inflating input costs. We will, however, closely monitor any structural uptrend
in demand and accordingly revisit our stance on relatively inexpensive stocks.
3QFY11 – improved profitability and respite from cost inflation
3QFY11 saw a significant sequential improvement in operating results for cement companies
as improved realization and moderating input cost inflation led to a 49% sequential
improvement in profitability of companies under our coverage universe. We discuss some
key operational highlights of 3QFY11:
Volumes: Our coverage universe registered a muted 6% sequential growth in volumes
(-2% yoy) as industry demand remained subdued. Although the month of October saw a
significant uptick in dispatches driven by large pent-up demand, volumes failed to sustain
the momentum for rest of the quarter.
Realization: Average realizations for companies under our coverage registered a 7%
sequential increase on back of price hikes taken in September. Cement prices saw a
healthy revival in 3QFY11 with All-India average cement prices increasing by ~Rs18/bag
during 3QFY11E, contributed largely by the South where cement prices increased by
Rs56/bag.
Raw material cost remained stable in 3QFY11 with a marginal decline of 3%
sequentially (-3% yoy). However, raw material cost for Ambuja Cement jumped sharply
by 145% qoq. The increase in raw material cost was likely reflective of the transport strike
at the company’s facilities in Himachal Pradesh, which could have increased the
dependence on purchased clinker and was correspondingly reflected in lower power and
fuel cost.
Power and fuel cost: Marginal sequential inflation of 2% (17% yoy) in power and fuel
cost as the full impact of surging coal prices expected in 4QFY11E. The impact will be
likely be higher for companies such as India Cement and Ambuja Cement that have
higher dependence on imported coal.
Freight cost: Freight cost remained relatively stable with marginal 4% (18% yoy)
sequential increase reflecting the increased freight during the quarter driven by hike in
fuel prices.
Overall input cost: Total input cost declined by 1% sequentially (12% yoy) as inflation in
power and fuel and fright cost remained moderate while higher volumes led to lower
overhead costs on a per ton basis.
4QFY11E –leverage benefits on higher volumes could drive profitability
As highlighted above, we expect pricing pressure to continue in the near term and do not
expect a significant sequential improvement in average realizations in 4QFY11E. We
accordingly build a marginal 1% sequential increase in average realization in 4QFY11E for
our coverage universe. We factor in 16% sequential increase in volumes for our coverage
universe (with fourth quarter being the seasonally strongest quarter), though we highlight
that lower-than-estimated offtake could be a key downside risk to our FY2011E earnings
estimate. We build a 3% sequential decline in operating costs on a per ton basis driven
primarily by leverage benefits on higher volumes in 4QFY11E. However, higher-thanestimated
inflation in either power and fuel cost or freight cost could surprise us negatively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cement
India
Absence of volume growth disconcerting. Cement companies under coverage
reported improved profitability backed by resurgent prices and stable input costs,
however, we remained concerned about the absence of volume growth (4.3% YTD).
We continue to maintain our cautious stance on the sector, as current price levels may
be difficult to sustain in the face of sluggish demand growth and, correspondingly, a
widening demand-supply gap. Maintain SELL on Ambuja Cement and India Cement.
Pricing (and profitability) improves, volumes muted
As highlighted in our preview dated January 5, 2011, 3QFY11E: Pricing improves, volumes lag,
cement companies reported a significantly better operating quarter (vis-à-vis 2QFY11) which saw
profitability improving 49% sequentially for our coverage universe, driven by strengthening
cement prices across India (much more pronounced in South India) and a temporary abatement in
input cost inflation (1% qoq). However, the benefit of improved profitability was lost to sedate
volume growth with our coverage universe registering a 2% yoy decline as overall cement demand
remained weak during the quarter. Demand in South India was worst hit as reflected in a 26% yoy
decline in ICEM’s volumes.
Supply overhang magnifies in the absence of volume growth
We remain cautious on the business environment (despite recent strength in cement prices), as the
absence of volume growth (4.3% YTD) worsens the demand-supply mismatch. Cement volumes
continue to remain muted with industry sales in months November and December registering a
yoy decline of 6% and 3% with South India being worse off with estimated decline of 19% and
20% during the same period. Besides the absence of volume growth and pricing pressures,
cement companies will likely have to grapple with higher input cost—as rising prices of imported
coal and crude will further sap into the profitability of cement companies.
Sustaining prices remains a challenge; valuations less expensive now
Large cement companies are trading at replacement cost (US$120/ton) after recent under
performance. We reiterate our cautious stance on the sector given limited signs of any
improvement in overall industry macro as it continues to be plagued by subdued demand, lower
utilization levels and inflating input costs. We will, however, closely monitor any structural uptrend
in demand and accordingly revisit our stance on relatively inexpensive stocks.
3QFY11 – improved profitability and respite from cost inflation
3QFY11 saw a significant sequential improvement in operating results for cement companies
as improved realization and moderating input cost inflation led to a 49% sequential
improvement in profitability of companies under our coverage universe. We discuss some
key operational highlights of 3QFY11:
Volumes: Our coverage universe registered a muted 6% sequential growth in volumes
(-2% yoy) as industry demand remained subdued. Although the month of October saw a
significant uptick in dispatches driven by large pent-up demand, volumes failed to sustain
the momentum for rest of the quarter.
Realization: Average realizations for companies under our coverage registered a 7%
sequential increase on back of price hikes taken in September. Cement prices saw a
healthy revival in 3QFY11 with All-India average cement prices increasing by ~Rs18/bag
during 3QFY11E, contributed largely by the South where cement prices increased by
Rs56/bag.
Raw material cost remained stable in 3QFY11 with a marginal decline of 3%
sequentially (-3% yoy). However, raw material cost for Ambuja Cement jumped sharply
by 145% qoq. The increase in raw material cost was likely reflective of the transport strike
at the company’s facilities in Himachal Pradesh, which could have increased the
dependence on purchased clinker and was correspondingly reflected in lower power and
fuel cost.
Power and fuel cost: Marginal sequential inflation of 2% (17% yoy) in power and fuel
cost as the full impact of surging coal prices expected in 4QFY11E. The impact will be
likely be higher for companies such as India Cement and Ambuja Cement that have
higher dependence on imported coal.
Freight cost: Freight cost remained relatively stable with marginal 4% (18% yoy)
sequential increase reflecting the increased freight during the quarter driven by hike in
fuel prices.
Overall input cost: Total input cost declined by 1% sequentially (12% yoy) as inflation in
power and fuel and fright cost remained moderate while higher volumes led to lower
overhead costs on a per ton basis.
4QFY11E –leverage benefits on higher volumes could drive profitability
As highlighted above, we expect pricing pressure to continue in the near term and do not
expect a significant sequential improvement in average realizations in 4QFY11E. We
accordingly build a marginal 1% sequential increase in average realization in 4QFY11E for
our coverage universe. We factor in 16% sequential increase in volumes for our coverage
universe (with fourth quarter being the seasonally strongest quarter), though we highlight
that lower-than-estimated offtake could be a key downside risk to our FY2011E earnings
estimate. We build a 3% sequential decline in operating costs on a per ton basis driven
primarily by leverage benefits on higher volumes in 4QFY11E. However, higher-thanestimated
inflation in either power and fuel cost or freight cost could surprise us negatively.
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