JP Morgan: January see modest recovery; Capacity touches 280MT; Budget not as negative as first reading

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


India Hard Hat
January see modest recovery; Capacity touches
280MT; Budget not as negative as first reading


• Jan-11 dispatches see modest increase: Cement dispatches increased m/m 7%
but the improvement is below expectation. Y/Y dispatch growth stood at a
modest 1.8% and YTD growth stands at 4%. Highlighting the regional disparity
in demand, of the 27 companies we collect data for, 13 cos reported y/y growth
while 14 reported y/y decline in Jan-11. ACC and ACEM have surprisingly
reported y/y increase of 7% and 5% while industry growth stood at 1.8%. JPA
(NR) continues to report strong number with 33% y/y and 11% m/m increase.
Cement prices increased most sharply in Western India with price increases of
7-8% in Jan-11 followed by Central India at 5-6%. We believe cement
companies have also increased prices in Feb-11.
• Capacity nears ~280/MT: Reported cement capacity increased by 5MT m/m
and we estimate current capacity is near 280MT with the capacity increase
taking place in Western and North India (Prism and Jaypee). All India reported
utilization stood at 78% with South India utilization rate at 61%.
• Granular state wise consumption data still points to a weak picture:
Analyzing the state level consumption data for January (which does not include
ACC and ACEM) points to a modest +3% m/m recovery in South India, with
AP showing +16% m/m but Karnataka declining 7% m/m and TN only +1%
m/m. West showed relatively better m/m increase in consumption with + 6%
with Gujarat and Maharashtra having +15% and +22% m/m increase
respectively with MP declining 25% m/m. North India showed +2.5% m/m
increase with modest m/m improvements in key states
• Budget impact limited: The Budget has proposed a change in the excise duty
structure from 10% of MRP (retail prices over Rs190/bag) to 10% ad valorem +
Rs160/MT. While our earlier calculations had pegged the required price
increase of as much as Rs7/bag, conversations with industry indicates that
the price increase required would be significantly lower at Rs1-2/bag as the
basis for calculating ad-valorem is lower than MRP. However the coal cost
increase (post COAL’s price increase) is clearly negative for cement companies.
The budget also reduced customs duty on certain raw materials (like gypsum, pet
coke) to 2.5% from 5% previously.
• Coal costs - A structural negative: We view COAL’s nearly 30% coal price
increase and the implementation of what seems to be a differential coal pricing
policy as a clear negative for Indian cement industry
• Cement earnings review: The 3QFY11 cement earnings were driven by
regional exposure, which drove realizations and volumes trends for the quarter.
Companies with exposure to South India reported very sharp recovery in
realizations sequentially, after a very weak 2Q where companies cut prices
below variable cost leading to EBITDA loss for companies in the 2Q. On the flip
side, continued weak demand led to low volumes in 3Q. Earnings for companies
with operations in North and Central India outperformed the industry in volumes
but realizations were weak during the quarter. Companies highlighted improving
realization to continue in 4Q, with stable prices in South/West and benefits from
price hikes taken in North and Central India from Dec-11 onwards.