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Cement Industry
Strong earnings given price/cost mismatch, but likely
to have peaked for the year
• Strong operating earnings beat across Big 3 driven by cement prices and
company-specific reasons: ACC, ACEM and UTCEM all reported both
EBITDA and PAT ahead of our and street estimates. At the EBITDA level
against JPMe ACC was +14%, ACEM was +9% and UTCEM was +5% while
at PAT level against JPMe, ACC was +21% (aided by lower tax rate and
higher other income), ACEM was +21% (lower tax rate) and UTCEM was
+30% (sharply lower tax rate at 11%). ASP increase q/q stood at +5% for ACC,
+9% for ACEM and +8% for UTCEM, though for UTCEM presence of white
cement makes underlying cement ASP comparisons difficult. EBITDA/MT for
ACEM stood at Rs1112/MT (+59%, aided by lower clinker costs as captive
clinker picked up), UTCEM at Rs1005/MT (+30% q/q) and ACC at Rs941/MT
(+55% q/q aided by lower opaque ‘other expenditure ‘and lower power purchase
from the grid).
• Coal cost yet to flow through: Power and Fuel costs were lower/flat q/q across
all 3 given that a) Coal India’s price increase (+30%) only happened towards the
latter half of the quarter and b) inventory lag through. We believe cost pressures
are likely to surge from here as the full impact of the coal price increase flows
through from the current April-June quarter. Freight costs have also moved up
given tariff increases.
• ‘‘But then the cement price hikes have also not fully flowed through, so
margins should remain flat'’- No, margins likely to decline from here:
Admittedly cement price increases happened only in Feb and so the full impact
has yet to flow through. However, since April, prices in some markets in
North/Central and Western India have declined by 5-7%. While we continue to
hear from cement dealers of companies wanting to push another price hike in
May, we would highlight that demand on the ground has not recovered
meaningfully. Hence EBITDA/MT should decline from here. Q/Q the
sharpest cement price increases in the March quarter took place in West (+14%),
followed by North (+10%), South (+5%) and East (+3%).
• Price stability dependent on supply stability, Remain UW on ACC and
ACEM on valuations: We increase our EPS estimates for all 3 and our PT for
ACC to Rs900 and ACEM to Rs125, primarily as we increase our target
multiple given increasing replacement costs. However we remain UW given
FY12E valuations of $150/MT for ACC and $177/MT v/s $123/MT for
UTCEM. Cement prices have been volatile though have held up very well for an
overall industry utilization of ~73% given the supply discipline. Given the
weakness in demand, the overcapacity period has likely been extended.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cement Industry
Strong earnings given price/cost mismatch, but likely
to have peaked for the year
• Strong operating earnings beat across Big 3 driven by cement prices and
company-specific reasons: ACC, ACEM and UTCEM all reported both
EBITDA and PAT ahead of our and street estimates. At the EBITDA level
against JPMe ACC was +14%, ACEM was +9% and UTCEM was +5% while
at PAT level against JPMe, ACC was +21% (aided by lower tax rate and
higher other income), ACEM was +21% (lower tax rate) and UTCEM was
+30% (sharply lower tax rate at 11%). ASP increase q/q stood at +5% for ACC,
+9% for ACEM and +8% for UTCEM, though for UTCEM presence of white
cement makes underlying cement ASP comparisons difficult. EBITDA/MT for
ACEM stood at Rs1112/MT (+59%, aided by lower clinker costs as captive
clinker picked up), UTCEM at Rs1005/MT (+30% q/q) and ACC at Rs941/MT
(+55% q/q aided by lower opaque ‘other expenditure ‘and lower power purchase
from the grid).
• Coal cost yet to flow through: Power and Fuel costs were lower/flat q/q across
all 3 given that a) Coal India’s price increase (+30%) only happened towards the
latter half of the quarter and b) inventory lag through. We believe cost pressures
are likely to surge from here as the full impact of the coal price increase flows
through from the current April-June quarter. Freight costs have also moved up
given tariff increases.
• ‘‘But then the cement price hikes have also not fully flowed through, so
margins should remain flat'’- No, margins likely to decline from here:
Admittedly cement price increases happened only in Feb and so the full impact
has yet to flow through. However, since April, prices in some markets in
North/Central and Western India have declined by 5-7%. While we continue to
hear from cement dealers of companies wanting to push another price hike in
May, we would highlight that demand on the ground has not recovered
meaningfully. Hence EBITDA/MT should decline from here. Q/Q the
sharpest cement price increases in the March quarter took place in West (+14%),
followed by North (+10%), South (+5%) and East (+3%).
• Price stability dependent on supply stability, Remain UW on ACC and
ACEM on valuations: We increase our EPS estimates for all 3 and our PT for
ACC to Rs900 and ACEM to Rs125, primarily as we increase our target
multiple given increasing replacement costs. However we remain UW given
FY12E valuations of $150/MT for ACC and $177/MT v/s $123/MT for
UTCEM. Cement prices have been volatile though have held up very well for an
overall industry utilization of ~73% given the supply discipline. Given the
weakness in demand, the overcapacity period has likely been extended.
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