Indian Cement: Pressures all around ::CLSA

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Pressures all around
Cement industry despatches continued to disappoint in Jun-11 with 1QFY12
growth at <1%, driving a sharp cut in our FY12 estimate to ~6.5% now (cf.
10%+ earlier). Coupled with on-going supply pressures, this would result in
industry utilisation rates going down to historic low of ~75% in FY12 (~77%
in FY13). Average cement prices have corrected over 10% in the last 1-1.5
months at the time when cost pressures are at its peak (domestic/
international coal, freight etc.) which would keep sector margins under
pressure. Cement stocks have underperformed the Sensex by 8-13ppt in the
last three months which should continue; maintain cautious sector stance.
Disappointment in cement demand continues…
􀂉 The initial despatches by cement majors point to a weak industry volume growth
(<2% YoY) despite a very low base; 1QFY12 growth comes to <1%.
􀂉 Industry players and dealers cite high inflation, rising interest rates, labour
unavailability, weak infra spending as key reasons for this trend.
􀂉 Feedbacks indicate that the growth is likely to stay anaemic in the near-term.
􀂉 Our 10%+ industry volume growth, modelled at the beginning of the year, on the
hope of a pick up after a weak FY11 (+4.5%), looks clearly aggressive now.
􀂉 We therefore cut our FY12 forecast to 6.7% now (implied Jul-Mar’12: +8.5%).
􀂉 This would also necessitate a reduction in volume growth estimate for Ambuja
(~3ppt), UltraTech (~3ppt) impacting EPS by 3-6% (and limited impact for others).
… at the time when supply pressures are at peak
􀂉 The industry has added over 120mt of name-plate capacity and ~100mt of effective
capacity (adjusted for time-line, phased ramp-ups) over the last four years.
􀂉 While name plate capacities have peaked, we expect high effective additions to
continue in FY12 as well which should see a gradual moderation from FY13.
􀂉 Incremental effective supplies would yet again outstrip incremental demand in FY12
by 6ppt+ which would take down utilisation rates to a historic low of ~75%.
Cement prices correct 2-15% across regions since Jun-11…
􀂉 Cement prices have corrected 2-15% across regions in the last few weeks; price
cuts have been highest at over 30% in the state of Gujarat (west).
􀂉 Dealer feedbacks indicate that weak demand as well as supply pressures have been
the key reasons and pressures are likely to continue over the next few months.
􀂉 Interestingly, price cuts have been moderate in south India at 1-2%, thanks to
continuing producer discipline even while the region has lowest utilisation levels.
… even while costs have been mounting resulting in margin pressures
􀂉 Costs too have been rising as current unit costs are up around 18-20% YoY.
􀂉 While international coal prices are up 23% YoY, there has also been a sharp 30%
increase in domestic coal linkage price by Coal India with effect from Mar-11.
􀂉 Freight costs (30%+ of cost base) too have been moving up with rise in diesel
prices as well as due to factors like higher interest rates, rise in manpower cost etc.
􀂉 We note that our coverage universe reported over 30% decline in cement margins
(on per tonne basis) in FY11 to Rs750/t; we expect margins to stay at sub-optimal
levels over FY12-13CL.
Retain U-WT despite recent underperformance
􀂉 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.
􀂉 We expect adverse newsflows to continue in the sector and maintain our cautious
sector stance, therefore.
􀂉 We retain our negative recs. on ACC, Ambuja, UltraTech, Shree and India; Grasim
is the only positive rec. in our coverage.