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CEMENT
Lower than expected demand coupled with higher supplies is expected to
come in focus once again after witnessing two quarters of supply discipline.
We had expected cement prices to stay firm only till Q1FY12 and now we
have started witnessing signs of price declines. Though we expect
improvement in cement realizations for cement companies during Q1FY12
on yearly basis but we expect that prices will remain under pressure in the
coming quarters. We expect revenues in our coverage universe to decline by
8.6% on QoQ basis and grow by 11.5% on YoY basis excluding Ultratech's
numbers. Operating margins may stay flat sequentially or improve
marginally but are likely to decline in comparison with last year. Net profit
during Q1FY12 is expected to decline 20% QoQ due to lower volumes and
higher costs but may remain flattish on yearly basis.
Though we expect cement demand to grow at a CAGR of 9% between FY11-
FY13 but it will not be sufficient to absorb incremental supplies. We thus
continue to maintain our cautious stance on the sector and would only
recommend players which are available at attractive valuations. Our top
picks in the cement sector are Grasim industries and Shree Cements.
Demand growth to improve during FY12 but next two quarters
are important to watch out for.
Demand growth during FY11 was lower than our expectations but we expect demand
to witness an improvement in FY12 due to improvement expected in infrastructure
order awards as well as low base effect. However, we believe that next 3-
6 months are very important to watch out for infrastructure award process. Any delay
in awards would shift the demand revival further by six months to FY13.
Cement prices have started witnessing correction during Q1FY12
Cement prices have started witnessing correction during Q1FY12 due to lack of demand
revival as well as low construction activity during state assembly elections.
Prices witnessed sharp increases during Q4FY11 primarily led by supply discipline in
anticipation of demand growth going ahead. However, demand growth failed to
revive sharply. This coupled with issues related to labor availability and onset of
monsoons led to price declines in most of the regions. Our dealer interactions suggest
that prices may remain weak going ahead due to incremental supplies as well
as monsoons.
Overall costs continue to remain high
Cost pressures will continue to weigh on operating margins during Q1FY12. Though
average cement prices during Q1FY12 are expected to be better than Q1FY11, but
costs are likely to remain high due to higher coal prices as well as freight costs. Full
impact of hike in domestic coal prices is expected to be visible during Q1FY12.
Though imported coal prices have come off a bit, but its impact would be reflected
only in next quarter since companies normally have an inventory of 2 months. We
expect EBITDA/tonne to improve on yearly basis while we expect it to decline on a
sequential basis. With recent increase in the diesel prices, freight costs are likely to
increase further.
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