UBS: Cement Industry -January Volumes: growth remains subdued

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UBS Investment Research
Indian Cement Industry
January Volumes: growth remains subdued
􀂄 Ambuja/ACC volumes up ~5%/7%; Ultratech volumes declined 2.5%
January cement dispatches for Ambuja increased 5.3% YoY to 1.8mt (+0.8%
MoM), and ACC’s volume grew 7.3% YoY to 2.1mt (up 6.8% MoM). Ultratech’s
dispatches declined (-2.5% YoY) to 3.3mt (up 2% MoM). Volumes of other large
companies such as JP Associates grew 42% YoY led by expanded capacity (+46%
YTD). Dispatches during the April 2010-January 2011 period for
Ultratech/ACC/Ambuja have increased 3.2%/0.1%/6.6% YoY.

􀂄 Industry cement dispatches declined 3% YoY in December 2010
Industry dispatches declined 2.9% YoY in December 2010 and grew 4.6% YTD
(April-December 2010). This is the lowest growth during this period (April-
December) in the last five years (CAGR of about 8.2%). Although dispatches are
seasonally strong in Q4 (due to robust construction activity), we believe there are
downside risks to our FY11 estimate of 10% for industry demand growth, given
muted dispatch growth for the larger companies in January 2011. Industry data for
January is yet to be released.
􀂄 Remain cautious on sector—Grasim remains our preferred pick
We are cautious on the near-term outlook for the cement sector in India as: 1) we
expect industry over-capacity to remain in FY12 due to large capacity additions; 2)
cost pressures led by rising coal prices could keep profitability in check; 3)
increasing industry fragmentation across regions will likely impact pricing power;
and 4) stocks are already trading at a premium to replacement costs. Overall, we do
not think the risk-reward profile is favourable at current valuations. Our preferred
pick in the sector is Grasim, which we like for its VSF business