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India cement sector
Demand – sluggish in best period
Event
Lowest capacity utilisation since 1989: The Indian cement sector has seen
capacity utilisation dip to below 75% in 1Q FY12, which is the lowest since we
started collecting data in 1989. This weak demand has pushed prices sharply
lower in east and central India, with moderate falls in north and west India,
while south seems pretty resilient. Despite the lower volumes, we are
expecting good company profits for 1Q driven by higher cement prices in April
and May. We believe that any rally here can be utilised by investors to book
profits as risks continue to rise.
Impact
Top 3 companies report flat growth in June: Cumulatively, the top 3
companies – ACC, ACEM and UTCEM – with 100mt of cement capacity,
equivalent to about 40% of total industry capacity, have reported flat despatch
growth for June. Overall, we expect the industry to report 3–4% volume
growth YoY for June. This would pull down the 12-month moving average
growth to below 5%, well below street expectations of 8–9% growth.
Still, company profits should be good in 1Q FY12: We are expecting
margin expansion in 1Q FY12 driven by all-time high cement prices seen in
April and early May. On average, cement prices were Rs10–12/bag higher
than in 4Q FY11. This means that even after the coal cost increase of Rs80–
100/t of cement, we are likely to see margins expand for cement companies to
Rs60–80/t.
However, 2Q looks challenging: From the peak seen in early May, we have
seen sharp price declines in large parts of the country. East and central India
have seen prices drop by Rs40/bag while north has seen around a Rs15/bag
decline. Gujarat has seen prices drop by a whopping Rs45/bag. Prices in
Mumbai and South India are largely flat.
Costs increasing – no relenting here: We expect to see the full impact of
Coal India’s price increase in the current quarter, while transport costs are set
to rise post the increase in diesel prices last week.
Cartel enquiries reach next stage: The Competition Commission has given
its comments to the cement sector and has asked the industry to explain what
they believe is cartel behaviour. Industry representatives are expected to reply
in 15 days or so. In the meanwhile, SFIO has separately been asking for
intensive data and is continuing with its investigation.
Outlook
Maintain Underweight: We expect the cement sector to remain in oversupply
for the next two years; this means that it would be a matter of maintaining
margins at the best case. The weak demand outlook is not helping; add to
that the risk of penalties by CCI means and that could mean more de-rating.
Positioning for the results: ACC seems a better play as compared to ACEM
for these quarterly results as its volume increase and exposure to south
should help earnings growth
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