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Expensive valuations, Re-iterate Sell on large caps
Large cap cement stocks under our coverage universe
have outperformed Nifty by 3-17% in last two months due
to increase in retail price of cement across India. Retail
price of cement has reached Rs 265/bag against Rs
218/bag in Q2FY11 and Rs 235/bag in Q3FY11. Demand
however continues to be disappointing and we expect
FY11E despatches growth to be ~4.5% against our earlier
expectation of 7.5% in our ‘initiating report’ dated Dec 15,
2010. We believe that the industry will operate at lower
utilization rates of 77-80% in FY12E and FY13E and hence,
volatility in cement prices cannot be negated. Large cap
cement companies (ACC, Ambuja and Ultra Tech) are
trading at a significant premium to replacement cost and
their historical average trading multiples, which in our
view, is not justifiable considering the threat of lower
cement prices and increasing raw material costs, freight
and energy costs. We re-iterate Sell rating on ACC, Ambuja
and Ultra Tech.
Pan- India average retail price increases by 12% QoQ:
Retail price of cement has increased by 12% QoQ to Rs
265/bag during Q4FY11E despite sluggish despacthes
growth, mainly due to production discipline of
manufacturers. In cities like Delhi, Mumbai and Kolkata
prices are hovering in range of Rs 280- 300/bag. Though,
the prices can sustain at these levels in the near term, we
expect it to decline again during monsoons when
construction activities generally slowdown.
FY11E despatches growth likely to be ~4.5%: During
April ’10- Feb ’11, cement despatches have increased by
5% to 189.4 MT. Our dealers’ interaction suggests muted
cement demand in the month of March ’11 and hence,
we are expecting FY11E despatches growth to be ~4.5%
against our earlier expectation of 7.5% forecast in our
‘initiating sector’ coverage report dated Dec 15, 2010.
Glut expected to persist till FY13E: Installed capacity of
the cement industry increased by 33.3 MT to 290 MT at
the end of Feb 2011 against FY11E despatches of 208.7
MT. We expect further capacity addition of 46.7 MT till
FY13E, which will result in a subdued effective utilization
rate of 77-80% over the next two years.
Maintain Sell on ACC, Ambuja and Ultra Tech: We reiterate
our Sell rating on large-cap cement players ACC,
Ambuja and Ultratech given the rich valuations in a
demand-supply mismatch scenario. These stocks are
trading at a significant premium to the replacement cost
and their average historical trading multiples which we
believe is unwarranted considering the demand-supply
mismatch and expected volatility in cement prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Expensive valuations, Re-iterate Sell on large caps
Large cap cement stocks under our coverage universe
have outperformed Nifty by 3-17% in last two months due
to increase in retail price of cement across India. Retail
price of cement has reached Rs 265/bag against Rs
218/bag in Q2FY11 and Rs 235/bag in Q3FY11. Demand
however continues to be disappointing and we expect
FY11E despatches growth to be ~4.5% against our earlier
expectation of 7.5% in our ‘initiating report’ dated Dec 15,
2010. We believe that the industry will operate at lower
utilization rates of 77-80% in FY12E and FY13E and hence,
volatility in cement prices cannot be negated. Large cap
cement companies (ACC, Ambuja and Ultra Tech) are
trading at a significant premium to replacement cost and
their historical average trading multiples, which in our
view, is not justifiable considering the threat of lower
cement prices and increasing raw material costs, freight
and energy costs. We re-iterate Sell rating on ACC, Ambuja
and Ultra Tech.
Pan- India average retail price increases by 12% QoQ:
Retail price of cement has increased by 12% QoQ to Rs
265/bag during Q4FY11E despite sluggish despacthes
growth, mainly due to production discipline of
manufacturers. In cities like Delhi, Mumbai and Kolkata
prices are hovering in range of Rs 280- 300/bag. Though,
the prices can sustain at these levels in the near term, we
expect it to decline again during monsoons when
construction activities generally slowdown.
FY11E despatches growth likely to be ~4.5%: During
April ’10- Feb ’11, cement despatches have increased by
5% to 189.4 MT. Our dealers’ interaction suggests muted
cement demand in the month of March ’11 and hence,
we are expecting FY11E despatches growth to be ~4.5%
against our earlier expectation of 7.5% forecast in our
‘initiating sector’ coverage report dated Dec 15, 2010.
Glut expected to persist till FY13E: Installed capacity of
the cement industry increased by 33.3 MT to 290 MT at
the end of Feb 2011 against FY11E despatches of 208.7
MT. We expect further capacity addition of 46.7 MT till
FY13E, which will result in a subdued effective utilization
rate of 77-80% over the next two years.
Maintain Sell on ACC, Ambuja and Ultra Tech: We reiterate
our Sell rating on large-cap cement players ACC,
Ambuja and Ultratech given the rich valuations in a
demand-supply mismatch scenario. These stocks are
trading at a significant premium to the replacement cost
and their average historical trading multiples which we
believe is unwarranted considering the demand-supply
mismatch and expected volatility in cement prices.
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