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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Initiation: despite oversupply,
outlook appears bright
• We see cement stocks as long-term plays, and believe they face
some near-term headwinds
• A recovery in demand and greater discipline among industry
players should enhance their pricing power
• Valuations at near mid-cycle levels provide some comfort
What's new
We expect cement capacity
additions to slow over the next three
years as the industry has already
added about 120mtpa over the past
3-4 years. The major cement players
have also completed their capex
plans, and newly-announced
capacity will take at least three years
to come on stream. Companies’
balance sheets are much stronger
now than they were during the
previous downcycle, which implies
lower financial leverage.
What's the impact
We believe earnings for companies
operating in India’s Cement Sector
have bottomed out and are likely to
rebound over the next two years,
driven by our expectations of a
recovery in demand for cement and
an improvement in cement prices.
We believe a pick-up in demand, led
by the construction and housing
sectors, will result in a well-balanced
cement market over the next two
years, and provide steady support
for the upward trend in cement
prices. We forecast cement prices in
India to rise by about 7% YoY for
FY12 and 5% YoY for FY13, backed
by supply discipline and industry
consolidation. Our analysis indicates
that a 1% change in cement prices
could affect the FY12 earnings of the
larger cement companies that we
cover by 4-6%. While coal and
freight costs have increased over the
past 12 months, companies have
been able to mitigate this through
cement-price increases.
We see the key risk to our call as
lower-than-expected cementdemand
growth, due to slowdowns
in housing demand and the pace of
infrastructure development, along
with falling ASPs and an increase in
input costs, which may have a
significant negative impact on the
cement companies’ earnings. Also, if
the cement players fail to maintain
pricing discipline, cement-price cuts
would be the natural result.
What we recommend
We initiate coverage of the India
Cement Sector with a Positive rating.
Given that the cement stocks are
trading currently at about mid-cycle
valuation levels and at EV/tonne
valuations on a par (at about a 10%
premium) with replacement costs,
we believe they should be rerated
should cement demand pick up. We
initiate coverage of five companies.
We forecast earnings for the three
large ones to rise at CAGRs of 17-
20% over the FY11-14/2010-13
period, driven by strong salesvolume
growth and improving
cement prices. Ambuja Cements
(Ambuja) is trading currently at
what we see as an attractive
EV/EBITDA valuation.
Our top picks in the large-cap space
are Ambuja and Ultratech Cement
(Ultratech), due mainly to their
presence in the region where the
demand-supply mix is most
favourable. Meanwhile, we believe
India Cements (ICL) is trading at
attractive valuations on an
EV/tonne basis.
How we differ
Our ratings and earnings forecasts
differ from those of the market, as we
believe that the consensus forecasts
are too conservative regarding the
strength of cement prices. Our
2011/FY12 and 2012/FY13 EBITDA
forecasts are respectively 1% and 6.6%
higher than those of the Bloomberg
consensus.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Initiation: despite oversupply,
outlook appears bright
• We see cement stocks as long-term plays, and believe they face
some near-term headwinds
• A recovery in demand and greater discipline among industry
players should enhance their pricing power
• Valuations at near mid-cycle levels provide some comfort
What's new
We expect cement capacity
additions to slow over the next three
years as the industry has already
added about 120mtpa over the past
3-4 years. The major cement players
have also completed their capex
plans, and newly-announced
capacity will take at least three years
to come on stream. Companies’
balance sheets are much stronger
now than they were during the
previous downcycle, which implies
lower financial leverage.
What's the impact
We believe earnings for companies
operating in India’s Cement Sector
have bottomed out and are likely to
rebound over the next two years,
driven by our expectations of a
recovery in demand for cement and
an improvement in cement prices.
We believe a pick-up in demand, led
by the construction and housing
sectors, will result in a well-balanced
cement market over the next two
years, and provide steady support
for the upward trend in cement
prices. We forecast cement prices in
India to rise by about 7% YoY for
FY12 and 5% YoY for FY13, backed
by supply discipline and industry
consolidation. Our analysis indicates
that a 1% change in cement prices
could affect the FY12 earnings of the
larger cement companies that we
cover by 4-6%. While coal and
freight costs have increased over the
past 12 months, companies have
been able to mitigate this through
cement-price increases.
We see the key risk to our call as
lower-than-expected cementdemand
growth, due to slowdowns
in housing demand and the pace of
infrastructure development, along
with falling ASPs and an increase in
input costs, which may have a
significant negative impact on the
cement companies’ earnings. Also, if
the cement players fail to maintain
pricing discipline, cement-price cuts
would be the natural result.
What we recommend
We initiate coverage of the India
Cement Sector with a Positive rating.
Given that the cement stocks are
trading currently at about mid-cycle
valuation levels and at EV/tonne
valuations on a par (at about a 10%
premium) with replacement costs,
we believe they should be rerated
should cement demand pick up. We
initiate coverage of five companies.
We forecast earnings for the three
large ones to rise at CAGRs of 17-
20% over the FY11-14/2010-13
period, driven by strong salesvolume
growth and improving
cement prices. Ambuja Cements
(Ambuja) is trading currently at
what we see as an attractive
EV/EBITDA valuation.
Our top picks in the large-cap space
are Ambuja and Ultratech Cement
(Ultratech), due mainly to their
presence in the region where the
demand-supply mix is most
favourable. Meanwhile, we believe
India Cements (ICL) is trading at
attractive valuations on an
EV/tonne basis.
How we differ
Our ratings and earnings forecasts
differ from those of the market, as we
believe that the consensus forecasts
are too conservative regarding the
strength of cement prices. Our
2011/FY12 and 2012/FY13 EBITDA
forecasts are respectively 1% and 6.6%
higher than those of the Bloomberg
consensus.
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