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FY12 has started off on a weak note on cement demand with slowdown in growth across all the
key demand segments of the cement market. Cement prices have corrected by 2-8% across
India except south India. With the full impact of higher coal costs in Q1FY12, and weaker prices,
we could see a margin drop qoq
Cement demand to grow at 4-5% in Q1FY12
The industry is generally disappointed at the level of cement demand growth in the Q1FY12
based on the trends so far. All the key segments of the cement demand ie, urban housing,
rural housing and infrastructure are witnessing slower growth.
Management stated that in metros, there are very few " ground breaking " or new project
start-ups happening, and this is largely due to 2 factors 1) clearances for projects is getting
delayed due to new norms which builders have to comply with; 2) the high property prices,
and rising interest rates is also impacting demand on the margin. In the rural side, while farm
incomes have been buoyant with higher crop prices, but the farmers have been diverting
more resources in boosting productivity and output, and have not correspondingly increased
their re-construction of homes which typically happens. In the infrastructure side, there has
been slow down in execution both in government projects, and private sector projects.
Lastly 4 states (Tamil Nadu, West Bengal, Kerala and Assam) went for state elections in the
quarter, and hence there has been a slow down in projects, due to government transition
related issues. However, with majority governments in 2 key states - Tamil Nadu and West
Bengal, the industry is hopeful of a revival in spending on pending projects, and new project
start-ups.
Cement prices are beginning to correct on an all-India basis
Cement prices which had rallied by around 20% post 2010 monsoon, have started correcting
on an all-India basis reflecting the impact of the ongoing over-supply conditions. We have
seen a correction of 2-8% in most markets except South India. Since this price fall has
happened prior to the onset of annual monsoon, we believe that there could be more price
corrections in the July to September 2011, which is seasonally weak for cement demand.
UltraTech Cement like most leading cement companies saw margin expansion of around
Rs200/mt in Q4FY11 due to improvement in cement prices. However, in Q1FY12, the full
impact of the coal price hike in March 2011, and weakness in cement prices would impact
margins.
UltraTech Cement plans to add 25mmt of capacity in next 5 years
UltraTech Cement currently has a market share of 17% in terms of cement capacity, and to
sustain this level of market share it plans to add 25mmt of capacity over the next 5 years. It
has already stated work on 9.2mmt of capacity expansion at its existing locations at
Chhattisgarh and Karnataka along with captive power capacity. This is being undertaken with
a capital cost of Rs56bn. In order to strengthen its cost competitiveness, it is investing in
setting up additional captive power capacity of 170MW and waste heat recovery system of
45MW.
Overall, we remain cautious on the cement sector's margin outlook for the next 2 years, and
believe, this would lead to stock under-performing the markets. While, the recent price increases
have been more production discipline induced, we doubt the sustainability of the same for next 6-
8 quarters given the fragmented structure of the Indian cement market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
FY12 has started off on a weak note on cement demand with slowdown in growth across all the
key demand segments of the cement market. Cement prices have corrected by 2-8% across
India except south India. With the full impact of higher coal costs in Q1FY12, and weaker prices,
we could see a margin drop qoq
Cement demand to grow at 4-5% in Q1FY12
The industry is generally disappointed at the level of cement demand growth in the Q1FY12
based on the trends so far. All the key segments of the cement demand ie, urban housing,
rural housing and infrastructure are witnessing slower growth.
Management stated that in metros, there are very few " ground breaking " or new project
start-ups happening, and this is largely due to 2 factors 1) clearances for projects is getting
delayed due to new norms which builders have to comply with; 2) the high property prices,
and rising interest rates is also impacting demand on the margin. In the rural side, while farm
incomes have been buoyant with higher crop prices, but the farmers have been diverting
more resources in boosting productivity and output, and have not correspondingly increased
their re-construction of homes which typically happens. In the infrastructure side, there has
been slow down in execution both in government projects, and private sector projects.
Lastly 4 states (Tamil Nadu, West Bengal, Kerala and Assam) went for state elections in the
quarter, and hence there has been a slow down in projects, due to government transition
related issues. However, with majority governments in 2 key states - Tamil Nadu and West
Bengal, the industry is hopeful of a revival in spending on pending projects, and new project
start-ups.
Cement prices are beginning to correct on an all-India basis
Cement prices which had rallied by around 20% post 2010 monsoon, have started correcting
on an all-India basis reflecting the impact of the ongoing over-supply conditions. We have
seen a correction of 2-8% in most markets except South India. Since this price fall has
happened prior to the onset of annual monsoon, we believe that there could be more price
corrections in the July to September 2011, which is seasonally weak for cement demand.
UltraTech Cement like most leading cement companies saw margin expansion of around
Rs200/mt in Q4FY11 due to improvement in cement prices. However, in Q1FY12, the full
impact of the coal price hike in March 2011, and weakness in cement prices would impact
margins.
UltraTech Cement plans to add 25mmt of capacity in next 5 years
UltraTech Cement currently has a market share of 17% in terms of cement capacity, and to
sustain this level of market share it plans to add 25mmt of capacity over the next 5 years. It
has already stated work on 9.2mmt of capacity expansion at its existing locations at
Chhattisgarh and Karnataka along with captive power capacity. This is being undertaken with
a capital cost of Rs56bn. In order to strengthen its cost competitiveness, it is investing in
setting up additional captive power capacity of 170MW and waste heat recovery system of
45MW.
Overall, we remain cautious on the cement sector's margin outlook for the next 2 years, and
believe, this would lead to stock under-performing the markets. While, the recent price increases
have been more production discipline induced, we doubt the sustainability of the same for next 6-
8 quarters given the fragmented structure of the Indian cement market.
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