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Cement
India
Cement prices—cartel or can’t tell. We are perplexed by the Rs40-50/bag increase
over the past few months in cement prices, despite sluggish demand (4.6% YTD) and
low utilization rates (77% YTD). The trend affirms the strength of the ‘industry
discipline’ against all odds. Accordingly we review our stance (and earnings)—as such a
sharp price increase, although difficult to explain, could help overcome several obstacles
including rising cost of production and moderate volume growth.
Unprecedented price rise compels a review of sector outlook
An unprecedented price increase of Rs40-50/bag over the past few months and a strengthening
price trend over the past six months compels a review of our sector stance—we recommend that
investors selectively look at stocks where the current valuation multiples do not capture the
benefits of the price rise. We note that the price increase has been broad-based, starting from the
South in the month of September and percolating to other regions in subsequent months.
‘Efficiency’ of supplies difficult to explain—could well sustain in the near term
The current price increase demonstrates the strength of the ‘industry discipline’ as it comes despite
(1) sluggish demand growth of 4.6% YTD with consumption in South declining 5% YTD, and
(2) widening demand-supply gap as utilization levels have dropped to historical lows of 77%.
Increased consolidation in the industry may have helped the prices as the market share of the Topfive
players improved by ~380 bps (FY11YTD) on an all-India basis. We note that ‘industry
discipline’ could maintain the firmness in price trends through the peak construction season as the
pace of capacity addition slows down, and incremental supply pressures recede.
Rising input costs and sluggish demand growth could pare gains
Rising prices of imported coal, crude oil and lack of availability of domestic coal could partially
offset the benefits of improving realizations, while continued sluggishness in cement demand
could have the double impact of (1) lower volume sales and corresponding leverage impact, as
well as (2) breaking the ‘market discipline’ as industry participants try to capture incremental
volumes of a stagnant volume pie.
Upgrade Ultratech, Grasim and remain cautious on India Cement, Shree Cement
We recommend that investors look at Ultratech and Grasim given their reasonable valuations (4-
7X FY2012E EBITDA) and relative upside. We maintain our cautious stance on region-specific
players such as India Cement and Shree Cement and relatively expensive names such as ACC and
Ambuja (8.5X FY2012E EBITDA).
Unprecedented price increase of Rs40-50/bag
All-India cement prices have risen by Rs40-50/bag over the past few months with prices in
February alone rising by Rs30-40/bag across regions. We note that the price increase is much
higher than the cost increase and will therefore translate into higher profitability for cement
companies over the next few quarters. Exhibits 1 and 2 highlight the region-wise price
movement over the past few months, especially in the month of February
Valuation multiples attractive for select names, priced in for others
Average trading multiples for cement companies under coverage have contracted from 8-9X
FY2012E EBITDA to 4-7X currently for companies like Ultratech and Grasim, and reflect midcycle
multiples in comparison to the historical trading range of 5-9X. We prefer Grasim and
Ultratech on account of its reasonable valuations, superior profitability (EBITDA/ton of
Rs722/ton compared to Rs457/ton for ACC and Rs637/ton for Ambuja in 3QFY11) and
incremental contribution from VSF business for Grasim. Valuations for frontline stocks such
as ACC and Ambuja are not reasonable (8.5X on FY2012E EV/EBITDA versus historical
average of 8X).
On capacity metrics, cement companies are trading at an average of US$122/ton on
FY2012E capacity, in comparison to replacement cost of US$120/ton. Traditionally, cement
companies have traded near replacement cost during trough periods and at a premium to
replacement cost during peak earnings. The disparity between EV/ton of production and
EV/ton of capacity takes cognizance of lower utilizations rates and a staggered ramp-up of
production from new capacities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cement
India
Cement prices—cartel or can’t tell. We are perplexed by the Rs40-50/bag increase
over the past few months in cement prices, despite sluggish demand (4.6% YTD) and
low utilization rates (77% YTD). The trend affirms the strength of the ‘industry
discipline’ against all odds. Accordingly we review our stance (and earnings)—as such a
sharp price increase, although difficult to explain, could help overcome several obstacles
including rising cost of production and moderate volume growth.
Unprecedented price rise compels a review of sector outlook
An unprecedented price increase of Rs40-50/bag over the past few months and a strengthening
price trend over the past six months compels a review of our sector stance—we recommend that
investors selectively look at stocks where the current valuation multiples do not capture the
benefits of the price rise. We note that the price increase has been broad-based, starting from the
South in the month of September and percolating to other regions in subsequent months.
‘Efficiency’ of supplies difficult to explain—could well sustain in the near term
The current price increase demonstrates the strength of the ‘industry discipline’ as it comes despite
(1) sluggish demand growth of 4.6% YTD with consumption in South declining 5% YTD, and
(2) widening demand-supply gap as utilization levels have dropped to historical lows of 77%.
Increased consolidation in the industry may have helped the prices as the market share of the Topfive
players improved by ~380 bps (FY11YTD) on an all-India basis. We note that ‘industry
discipline’ could maintain the firmness in price trends through the peak construction season as the
pace of capacity addition slows down, and incremental supply pressures recede.
Rising input costs and sluggish demand growth could pare gains
Rising prices of imported coal, crude oil and lack of availability of domestic coal could partially
offset the benefits of improving realizations, while continued sluggishness in cement demand
could have the double impact of (1) lower volume sales and corresponding leverage impact, as
well as (2) breaking the ‘market discipline’ as industry participants try to capture incremental
volumes of a stagnant volume pie.
Upgrade Ultratech, Grasim and remain cautious on India Cement, Shree Cement
We recommend that investors look at Ultratech and Grasim given their reasonable valuations (4-
7X FY2012E EBITDA) and relative upside. We maintain our cautious stance on region-specific
players such as India Cement and Shree Cement and relatively expensive names such as ACC and
Ambuja (8.5X FY2012E EBITDA).
Unprecedented price increase of Rs40-50/bag
All-India cement prices have risen by Rs40-50/bag over the past few months with prices in
February alone rising by Rs30-40/bag across regions. We note that the price increase is much
higher than the cost increase and will therefore translate into higher profitability for cement
companies over the next few quarters. Exhibits 1 and 2 highlight the region-wise price
movement over the past few months, especially in the month of February
Valuation multiples attractive for select names, priced in for others
Average trading multiples for cement companies under coverage have contracted from 8-9X
FY2012E EBITDA to 4-7X currently for companies like Ultratech and Grasim, and reflect midcycle
multiples in comparison to the historical trading range of 5-9X. We prefer Grasim and
Ultratech on account of its reasonable valuations, superior profitability (EBITDA/ton of
Rs722/ton compared to Rs457/ton for ACC and Rs637/ton for Ambuja in 3QFY11) and
incremental contribution from VSF business for Grasim. Valuations for frontline stocks such
as ACC and Ambuja are not reasonable (8.5X on FY2012E EV/EBITDA versus historical
average of 8X).
On capacity metrics, cement companies are trading at an average of US$122/ton on
FY2012E capacity, in comparison to replacement cost of US$120/ton. Traditionally, cement
companies have traded near replacement cost during trough periods and at a premium to
replacement cost during peak earnings. The disparity between EV/ton of production and
EV/ton of capacity takes cognizance of lower utilizations rates and a staggered ramp-up of
production from new capacities.
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