UBS - Cement: Reiterate cautious outlook on cement, positive on VSF

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


UBS Investment Research
Indian Cement Industry
Reiterate cautious outlook on cement, positive on VSF
􀂄 Over-capacity to remain in FY12, higher than earlier expectation
We now expect industry-wide utilization of 83% in FY12 (UBS-e of 85% earlier,
~80% in FY11) led by lower-than-expected demand growth in FY11 and no
significant change in capacity addition plans. We maintain our view that the
demand-supply balance will stabilize in FY13 when utilization levels will be at
~88% levels (in-line with historical averages).

􀂄 Inflationary pressures might limit significant price hikes
We believe the recent cost increases (price increases by Coal India, budgetary
change in excise duty structure and increase in freight rates) would be passed on
but price increases are unlikely to be significantly margin accretive. Further price
hikes in our view might be difficult given the high inflationary environment.
􀂄 Cotton prices moved up sharply in last two months, positive for Grasim
Average cotton prices have increased ~45% QoQ in Q4FY11 (~132% YoY). We
think Grasim’s VSF realisations are also likely to increase in upcoming quarters
(cotton prices and Grasim’s VSF realisations have a high correlation; in FY11 so
far, cotton prices have increased ~58% YoY). We estimate VSF to contribute about
~25% of Grasim’s total EBITDA. VSF contributes ~35% to our valuation.
􀂄 Remain cautious on sector- Grasim remains our preferred pick
Cement stocks are trading at about 15-20% premium to replacement costs and the
risk-reward is not favourable at current levels given likely overcapacity in FY12.

vUtilization to remain under pressure in FY12
Utilization: We forecast industry utilization levels of around 80/83/88% in
FY11/12/13E compared to 82/85/91% earlier on the back of lower-thanexpected
demand growth in FY11 and no significant delays in capacity
expansion plans. Thus FY12 operating rates will continue to remain below
historical averages and lower than our earlier expectations:
Demand: We revise our industry demand growth assumption to 6% YoY in
FY11 (4.3% YoY in Apr’10-Jan’11; this is significantly lower than the last fiveyear
CAGR of 8.1% during this period), from 10% earlier (~6% growth levels
were last witnessed in FY04-05; demand has grown at a CAGR of 8% over the
past decade; this accelerated to an average rate of 10% over FY05-10).
We also revise our FY12 assumption to 11% from 12% earlier (UBS economist
has revised down India’s real GDP growth forecast by one percentage point
from 8.7% in FY12 to 7.7%; over the past 17 years, cement consumption growth
has been around 1.25x of real GDP growth; also ordering activity in the
infrastructure sector has been lower than expected that could lead to lower
cement demand from this sector in FY12 than earlier expected).
We maintain our FY13 demand growth assumption of 12% and expect good
operating rates in the industry at about 88% (in-line with historical averages).
We make minor changes to our capacity addition estimates.


Changes in estimates: The increase in our estimates for Ambuja are primarily
driven by changes in other income hence we maintain our PT. Estimates for
ACC declined driven by lower volumes which is offset by roll over our target
multiple to Mar-13 hence we maintain our PT. The change in PT for India
Cements to Rs95 from Rs100 is led by lower earnings estimates (due to lower
volumes), which is largely offset as we roll over our target multiple to Mar-13.
Our price targets are based on an EV/EBITDA multiple of 6.5x.