India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cement
Demand slowdown continues in 1QFY2012
After registering low dispatch growth of 4.9% in FY2011
(vs. FY2004-10 CAGR of ~9.3%), cement demand continued
to remain muted in the first two months of FY2012. During
April-May 2011, all-India cement dispatches remained flat at
35.86mt (35.92mt in April-May 2010). There was no pick-up
in demand in the southern region post the elections in
Tamil Nadu and Kerala. The political situation continued to
remain uncertain in Andhra Pradesh, resulting in low
government expenditure on housing and infra projects. Some
parts of the southern region were also affected due to
non-availability of sand. Demand was muted in the northern
region as well on account of moderate demand from the real
estate segment. Major reasons for low demand in this region
were labour shortage due to the harvest season and extremely
hot weather conditions. In the eastern region, demand failed to
pick-up post the elections in West Bengal. Demand pick-up was
slow in the western and central regions as well because of low
offtake from the real estate segment and labour shortage.
Performance of companies
During April-May 2011, among large players, ACC was the
top performer with 14.1% yoy dispatch growth, aided by
capacity additions at Bargarh and Chanda. JP Associates also
reported 7.7% yoy growth in dispatches. However, dispatches
of UltraTech Cement and Ambuja Cements declined by 3.9%
yoy and 3.7% yoy, respectively.
All-India capacity utilisation down to 70%
Poor demand scenario coupled with excess supply pulled down
capacity utilisation for the quarter to 70%. Capacity utilisation
has been the lowest in the southern region at ~60%, as the
region has been facing double whammy of poor demand as
well as huge capacity addition. Amongst all the regions, the
eastern region is operating at the highest capacity utilisation
(~92%) level. The central region is also operating at a healthy
capacity utilisation level in excess of 85%. Capacity utilisation
in the western region is at 80%, while the northern region has
capacity utilisation of 75%.
Price situation
All-India cement prices rose substantially since mid-February
due to the production discipline adopted by cement
manufacturers across the country, reaching their all-time highs
in March 2011. However, cement prices across the country have
begun to correct from the peaks of March 2011. Price corrections
have been in the range of `10-30/ bag.
Southern region: Price correction has been the lowest in the
southern region at `5-10/ bag from March 2011 levels. Cement
manufacturers have adopted a strong production discipline
despite low capacity utilisation, thereby capping the price fall
to a large extent. Currently, cement prices are at
`280/bag. On an average, cement prices have remained flat
when compared on a sequential basis.
Northern region: In the northern region, prices are currently
hovering at ~`275/bag, down by `15/bag from March 2011
levels. However, for 1QFY2012, on a sequential basis, prices
were higher by `10/bag.
Western region: The western region managed to hold on to the
peak-level prices till May-end. However, prices have corrected
since then. On an average, prices have corrected by `10-25
from March 2011 peak levels. The correction has been severe
in Gujarat, which has seen a price decline of ~`100/bag.
Currently, prices are at `255/bag in the western region.
For 1QFY2012, on a sequential basis, prices in the region were
higher by `5/bag.
Eastern region: In the eastern region, prices are at `235/bag,
down by `25/bag from March 2011 levels. For 1QFY2012 as
a whole as well, prices were down on a sequential basis.
Central region: Prices have declined the highest in the central
region since March 2011. Prices in this region fell by
~`30/bag from March 2011 levels and are currently at
`245/bag. On an average, prices during the quarter declined
on a sequential basis.
All-India capacity to increase by 18mt in FY2012
In FY2011, all-India cement capacity stood at ~304mtpa.
In FY2012, the country's cement capacity is expected to increase
by ~18mt. Capacity addition for FY2012 could go up to
24mtpa, if JP Associates fully meets its capacity addition targets
for the year. Capacity addition could be higher by another
3.3mtpa if ABG Group commissions its proposed plant during
the year.
Higher coal prices to exert margin pressures
Indian cement manufacturers are highly dependent on imported
coal due to the relatively low coal linkages within India.
The cement industry gets ~45% of its requirement from domestic
linkage coal, while the remaining is procured from global
markets and domestic open markets/e-auction routes. Global
spot coal prices were substantially higher on a yoy basis during
the quarter. Average prices of the New Castle Mckloksey 6,700kc
coal stood at ~US$120/tonne in 1QFY2012, as against
US$100/tonne in 4QFY2011. However, on a sequential basis,
prices declined by US$8/tonne.
In February 2011, Coal India (CIL) selectively raised coal prices
by significant 30% for sectors whose products command
market-driven prices. The price hike included the cement sector,
as cement prices are market driven. The impact of price hikes
by CIL is expected to be felt by cement companies from this
quarter. ACC has a substantial exposure to domestic coal
linkages as it sources 60% of its requirement under this route.
Ambuja Cements also has a high exposure of 40% to domestic
coal linkages.
Cement stocks – Performance on the bourses
During 1QFY2012, the large-cap cement stocks in our coverage
universe underperformed the Sensex, which lost 3.1% during
the quarter. India Cements was the biggest loser and fell by
25.7% during the quarter. Madras Cements also fell steeply by
20.2%. UltraTech too corrected substantially by 17.7%.
Key developments
Industry: During the quarter, the Government of India ordered
the Security Frauds Investigation Office (SFIO), Department of
Corporate Affairs, to investigate the allegations of cartelisation
amongst some of the cement manufacturers leading to
unsubstantiated rise in prices. The investigation would cover
the operations of the cement companies over the last 10 years.
The allegations if proved would result in the imposition of severe
penalties on cement manufacturers.The Competition
Commission of India (CCI), formerly known as Monopolies and
Restrictive Trade Practices Commission (MRTPC), which is yet
another government agency, is also investigating the allegations
of cartelisation. Cement manufacturers had come under the
radar of government agencies even in the past. The MRTPC
had carried similar investigations in 2007 as well into the
activities of cement companies. Although there have been
instances of cement manufacturers being penalised abroad,
there are no such precedences in India.
1QFY2012 expectations
Top line to increase by 5.2%
We expect our cement universe to report 5.2% yoy growth in its
top line, primarily on account of better realisations. However,
dispatches are expected to decline by 3.3%. We expect
India Cements to post the highest top-line growth of 16.5%.
Operating margins to decline
Operating margins of cement players are expected to decline
on a yoy basis due to increased power and fuel costs. However,
India Cements is expected to record a 579bp increase in margins
due to substantially higher realisations.
Outlook and valuation
Going ahead, we expect cement demand to decelerate in
2QFY2012 due to the onset of monsoons. Also, we expect
cement prices to witness further correction of `20-30/bag in
July due to further drop in utilisation levels. However, we expect
dispatches to pick up in a healthy way post the monsoons due
to acceleration in construction activities with FY2012 being the
last year of the Eleventh Plan period. We are Neutral on the
sector as a whole as we believe the stocks are fairly priced.
We maintain Buy on JK Lakshmi Cement due to its attractive
valuations.
No comments:
Post a Comment