Indian Cement: 1QFY12 preview --CLSA

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1QFY12 preview
Cement industry’s volume growth at <1% during 1Q has been the lowest quarterly
growth in the last 10-years. The realisations for our coverage should rise 4-6%
QoQ, though, cost pressures would largely offset these as the impact of 30% rise
in domestic coal linkage cost would be visible during the quarter. Resultant Ebitda
margins would be up marginally and we expect sector Ebitda to rise by a moderate
4%. The recent price corrections of over 10% in the last 4-6 weeks would impact
sector realisations from 2Q onwards; maintain U-WT.
Weak demand trend; better realisations on a sequential basis
q Demand trend remained weak in 1Q with industry volume growth at <1%.
q Our coverage universe too reported flat YoY volumes, though, ACC reported a 12%
YoY growth (driven by expansions) while UltraTech, Ambuja reported 2-3% decline.
q Average cement prices for 1Q averaged 4-5% higher on a sequential basis as the
quarter captures the full impact of hikes effected in the earlier quarter.
q As a result, we expect 1Q realisation for our coverage to rise at 10% YoY/ 5% QoQ.
q We also note that the recent price corrections (~10% in the last 1-1.5 months)
would impact the sector realisations from 2Q onwards.
Cost curve also moving up; 30% hike in domestic linkage coal to show up
q Cost curve too has been rising as we estimate a ~20% YoY rise in unit cost for our
coverage in 1Q.
q While imported coal prices have moved up 20%+ YoY, the impact of 30% rise in
domestic linkage price from Mar-11 would also be visible during in 1Q.
q The increase in freight costs due to the recent diesel price hike would however
impact from 2Q onwards.
1Q cement Ebitda to rise by a moderate ~4% YoY
q Better sequential realisations should help as we expect sector Ebitda margins to
rise 7% QoQ to Rs1,000/t.
q On a YoY basis, we expect Ebitda margins to rise by a moderate 4% as the impact
of higher realisations gets largely offset against cost inflation.
q As a result, Ebitda for our coverage should rise by just 4%; expect India Cements’
Ebitda to rise 95% while ACC, Ambuja, UltraTech should report a +/-10% growth.
Retain U-WT despite recent underperformance
q Cement stocks have underperformed the Sensex by 8-13ppt in the last three
months (ex-India Cements; -24ppt) on concerns of price cuts, slowing demand etc.
q We expect adverse newsflows to continue in the sector and maintain our cautious
sector stance, therefore.
q We retain our negative recs. on ACC, Ambuja, UltraTech, Shree and India; Grasim
is the only positive rec. in our coverage.