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What’s the theme?
The cement industry has suffered due to over supply and substantial rise in costs. Cement demand is expected
to pick up in the current quarter and continue until the onset of monsoon, giving price flexibility to manufacturers.
Although all is still not well for the sector, the intense pain of Q2FY11 appears to be behind us.
What will move the stock?
1) UTCEM has the most balanced geographical spread of cement capacities with major demand centres
i.e. North, West and South each accounting for 25% of total capacity. We expect UTCEM to achieve
volume of 42mn mt in FY12. 2) The demand-supply gap in the South had widened due to newer capacities
being commissioned and slump in demand in key state of AP. With realisation plummeting, industry moved
into the red. A production discipline undertaken by the cement industry has supported realisation growth
and marginal profit for incumbents. The discipline is expected to hold on until visible growth in demand
emerges. 2) Developmental projects in AP, which were stalled, should get a push considering easing of
political tensions. AP has been the trouble spot for the cement industry. 3) With growth in realisations, we
expect a 300bps expansion in margins in FY12. 4) UTCEM has lined up capex of Rs100bn to add 9.2mn
mt capacity over the next three years.
Where are we stacked versus consensus?
Our FY11 and FY12 earnings estimates are Rs52.6 and Rs69.1 respectively. Our FY12E earnings estimate
is 5.2% higher than consensus estimate of Rs65.7. We have a 'BUY' recommendation on the stock with a
target price of Rs1,177, which discounts FY12E EBITDA by 8x.
What will challenge our target price?
1) Any change in the excise duty structure to rein in price correction would hamper profitability; 2) Escalation
of unrest in AP in view of the Telangana issue stalemate would undermine demand growth;
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s the theme?
The cement industry has suffered due to over supply and substantial rise in costs. Cement demand is expected
to pick up in the current quarter and continue until the onset of monsoon, giving price flexibility to manufacturers.
Although all is still not well for the sector, the intense pain of Q2FY11 appears to be behind us.
What will move the stock?
1) UTCEM has the most balanced geographical spread of cement capacities with major demand centres
i.e. North, West and South each accounting for 25% of total capacity. We expect UTCEM to achieve
volume of 42mn mt in FY12. 2) The demand-supply gap in the South had widened due to newer capacities
being commissioned and slump in demand in key state of AP. With realisation plummeting, industry moved
into the red. A production discipline undertaken by the cement industry has supported realisation growth
and marginal profit for incumbents. The discipline is expected to hold on until visible growth in demand
emerges. 2) Developmental projects in AP, which were stalled, should get a push considering easing of
political tensions. AP has been the trouble spot for the cement industry. 3) With growth in realisations, we
expect a 300bps expansion in margins in FY12. 4) UTCEM has lined up capex of Rs100bn to add 9.2mn
mt capacity over the next three years.
Where are we stacked versus consensus?
Our FY11 and FY12 earnings estimates are Rs52.6 and Rs69.1 respectively. Our FY12E earnings estimate
is 5.2% higher than consensus estimate of Rs65.7. We have a 'BUY' recommendation on the stock with a
target price of Rs1,177, which discounts FY12E EBITDA by 8x.
What will challenge our target price?
1) Any change in the excise duty structure to rein in price correction would hamper profitability; 2) Escalation
of unrest in AP in view of the Telangana issue stalemate would undermine demand growth;
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