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What’s the theme?
The cement industry is suffering from over-supply and substantial rise in costs. Cement demand is expected to
pick up in the current quarter and continue until the onset of monsoons, giving price flexibility to manufacturers.
Although all is still not well for the sector, the intense pain of Q2FY11 appears to be behind.
What will move the stock?
1) UTCEM has the most balanced geographical spread of cement capacities with major demand centers,
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 South had widened due to newer capacities being
commissioned and slump in demand in the key AP state. With realisations plummeting, the industry moved
into the red. Nevertheless, the cement industry maintained production discipline, which supported growth
in realisations, engendering 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 receive a
boost considering easing political tensions in the state, which has been the trouble spot for the cement
industry. 3) With growth in realizations, 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 FY12 earnings estimate
is 10.8% higher than consensus estimate of Rs62.4. 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) Substantial increase in fuel costs especially coal would impact margins ; 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 is suffering from over-supply and substantial rise in costs. Cement demand is expected to
pick up in the current quarter and continue until the onset of monsoons, giving price flexibility to manufacturers.
Although all is still not well for the sector, the intense pain of Q2FY11 appears to be behind.
What will move the stock?
1) UTCEM has the most balanced geographical spread of cement capacities with major demand centers,
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 South had widened due to newer capacities being
commissioned and slump in demand in the key AP state. With realisations plummeting, the industry moved
into the red. Nevertheless, the cement industry maintained production discipline, which supported growth
in realisations, engendering 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 receive a
boost considering easing political tensions in the state, which has been the trouble spot for the cement
industry. 3) With growth in realizations, 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 FY12 earnings estimate
is 10.8% higher than consensus estimate of Rs62.4. 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) Substantial increase in fuel costs especially coal would impact margins ; 2) Escalation of unrest in AP in
view of the Telangana issue stalemate would undermine demand growth.
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