Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Cement Sector
A litmus test for the industry in the offing
Price is the name of game – but for how long? we prefer diversified players
After holding on to prices for more than six months, the Iongest period since
FY01, cement demand in India has fallen by c. 500-1,000bps MoM in April 2011.
Thus, probably at 75% CU, lower than September 2010, cement players face the
prospect of compressed demand a quarter before the onset of monsoons—the
slack season for construction. Based on our survey of channel partners, they find
some comfort in pricing trends in the North but see pricing risks in East/Central
India. We still prefer diversified names Grasim and Shree Cement.
Government continues to be only hope for demand
Following a flurry of action based on year-end spending on NREGA, etc., the blip
of a demand rise seen in March has completely dried out in April. Our survey of
channel partners/retailers suggest that cement offtake has dried out as
government contractors are absent in the market and there is a lull in activity in
other segments. Producers’ inventory level of low shelf life material, i.e., cement,
has risen to nearly 20-25 days (a nine-year high), vs. the historical average of 14-15
days. Industry maturity would be seriously challenged and producers close plants
if there is a major risk of price erosion
Strong pricing remains the key to maintain profitability
While it is early to incorporate the feedback of channel partners into our estimates,
we factor in all of India’s demand growth of 8% (in line with average 10-year
demand growth) in FY12E and FY13E. Furthermore, our assumptions now factor in
eight months of price discipline in FY12, vs. six months achieved in FY11.
Accordingly, we have built in average pricing growth of 7.4% in FY12E and 6.3%
in FY13E.
Prefer diversified players Grasim and Shree Cement; India Cements top sell
YTD the Deutsche Bank Cement Index has outperformed the BSE Sensex by 7%,
driven by 12% outperformance by Grasim. Despite this outperformance, we
would still prefer diversified players. Among the large caps, we prefer Grasim, as it
is trading at a 10-40% discount to pure cement companies on valuations. Among
mid-caps, we continue to prefer Shree Cement, given its high concentration in the
Northern India market (c. 70% of its despatches), which enjoys better production
discipline and demand growth than other regions. India Cements continues to
remain our top sell in the sector, given (a) the continued excess supply in the
Southern region and (b) the likely softness in demand after elections in TN and
Kerala and political uncertainty in AP. Our valuation methodology continues to
remain the same (average of a target PE of 15xFY12E and target EV/EBITDA of
7.5xFY12E to arrive at our 12M target prices for the pure cement names and SOTP
methodology for the diversified players). Key risks are: 1) higher-than-estimated
demand growth and 2) the ability of cement producers in all regions to hold on to
their maturity for a period longer than our estimates.
Demand on verge of extreme
disappointment
After a decade of low levels of demand growth in FY11…
Indian cement demand growth fell by 750bps in FY11 to 4%—the biggest fall in the last
decade. Our discussion with industry players and channel checks indicate that demand has
been lower than expected and is becoming strongly correlated to government spend towards
rural schemes—which is a surprise to us. However, perhaps it appears as though the other
segment for demand growth, i.e., housing, corporate, and infra-segments are showing
sluggishness.
…. A build-up of inventory in April 2011 – a bad omen
Our latest channel checks suggest that for the first time after a gap of six months, Indian
cement companies are facing huge stockpiling—with an unseasonal impact on inventory
levels. To recap, the inventory in the system ranges from a low of 12 to 13 days in a busy
season to a level of 28 to 30 days in slack season. However, to our surprise, cement
stockists as well as distributors are saying that producer level inventory is 20-25 days, while
dealer level inventory is of another five to eight days, resulting in hardly any fresh demand
being raised by the channel partners. So far, the producer discipline has held on to prices,
especially in Northern India, and, to an extent, in Southern and Western India. However,
cracks have begun to appear in Eastern and Central India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Cement Sector
A litmus test for the industry in the offing
Price is the name of game – but for how long? we prefer diversified players
After holding on to prices for more than six months, the Iongest period since
FY01, cement demand in India has fallen by c. 500-1,000bps MoM in April 2011.
Thus, probably at 75% CU, lower than September 2010, cement players face the
prospect of compressed demand a quarter before the onset of monsoons—the
slack season for construction. Based on our survey of channel partners, they find
some comfort in pricing trends in the North but see pricing risks in East/Central
India. We still prefer diversified names Grasim and Shree Cement.
Government continues to be only hope for demand
Following a flurry of action based on year-end spending on NREGA, etc., the blip
of a demand rise seen in March has completely dried out in April. Our survey of
channel partners/retailers suggest that cement offtake has dried out as
government contractors are absent in the market and there is a lull in activity in
other segments. Producers’ inventory level of low shelf life material, i.e., cement,
has risen to nearly 20-25 days (a nine-year high), vs. the historical average of 14-15
days. Industry maturity would be seriously challenged and producers close plants
if there is a major risk of price erosion
Strong pricing remains the key to maintain profitability
While it is early to incorporate the feedback of channel partners into our estimates,
we factor in all of India’s demand growth of 8% (in line with average 10-year
demand growth) in FY12E and FY13E. Furthermore, our assumptions now factor in
eight months of price discipline in FY12, vs. six months achieved in FY11.
Accordingly, we have built in average pricing growth of 7.4% in FY12E and 6.3%
in FY13E.
Prefer diversified players Grasim and Shree Cement; India Cements top sell
YTD the Deutsche Bank Cement Index has outperformed the BSE Sensex by 7%,
driven by 12% outperformance by Grasim. Despite this outperformance, we
would still prefer diversified players. Among the large caps, we prefer Grasim, as it
is trading at a 10-40% discount to pure cement companies on valuations. Among
mid-caps, we continue to prefer Shree Cement, given its high concentration in the
Northern India market (c. 70% of its despatches), which enjoys better production
discipline and demand growth than other regions. India Cements continues to
remain our top sell in the sector, given (a) the continued excess supply in the
Southern region and (b) the likely softness in demand after elections in TN and
Kerala and political uncertainty in AP. Our valuation methodology continues to
remain the same (average of a target PE of 15xFY12E and target EV/EBITDA of
7.5xFY12E to arrive at our 12M target prices for the pure cement names and SOTP
methodology for the diversified players). Key risks are: 1) higher-than-estimated
demand growth and 2) the ability of cement producers in all regions to hold on to
their maturity for a period longer than our estimates.
Demand on verge of extreme
disappointment
After a decade of low levels of demand growth in FY11…
Indian cement demand growth fell by 750bps in FY11 to 4%—the biggest fall in the last
decade. Our discussion with industry players and channel checks indicate that demand has
been lower than expected and is becoming strongly correlated to government spend towards
rural schemes—which is a surprise to us. However, perhaps it appears as though the other
segment for demand growth, i.e., housing, corporate, and infra-segments are showing
sluggishness.
…. A build-up of inventory in April 2011 – a bad omen
Our latest channel checks suggest that for the first time after a gap of six months, Indian
cement companies are facing huge stockpiling—with an unseasonal impact on inventory
levels. To recap, the inventory in the system ranges from a low of 12 to 13 days in a busy
season to a level of 28 to 30 days in slack season. However, to our surprise, cement
stockists as well as distributors are saying that producer level inventory is 20-25 days, while
dealer level inventory is of another five to eight days, resulting in hardly any fresh demand
being raised by the channel partners. So far, the producer discipline has held on to prices,
especially in Northern India, and, to an extent, in Southern and Western India. However,
cracks have begun to appear in Eastern and Central India.
No comments:
Post a Comment