IIFL: Cement up-cycle to return

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IIFL, one of the leading players in the Indian financial services space, believes that the cyclical upturn in the cement sector in India is not far behind. The company recently upgraded its stance on the cement sector to Overweight.

In its report Cement on the move – return of the up-cycle, IIFL states that the domestic cement cycle is at a trough; from here on, the company expects all key industry metrics to improve, particularly for cement players in the eastern, northern and western regions.

In contrast to the FY08-11 period when capacity additions outpaced incremental demand by 120%, IIFL believes that during FY11-14, incremental demand will rise faster than new supply. India’s cement demand has historically grown at 1.2x real GDP growth. Over the past two years, cement demand has grown at just 6% YoY and a likely reversion to mean will drive a pick-up in growth rates. Incremental capacity addition in the next three years, compared with FY08-11, will almost halve to 54m tonnes. IIFL expects utilisation levels to bottom out in the current quarter and gradually but sustainably improve from here on. Capacity utilisation levels in the east, north and west should rise to 85-93% by FY14 (up 6-8% from current levels), aiding the return of pricing power.

IIFL’s cement analyst, J Radhakrishnan, said, “Rising capacity utilisation, improving competitive environment (due to a fall in the number of new entrants) and better industry discipline will aid the return of pricing power. However, the gains will be uneven across regions. While producers in the eastern, northern and western regions will gain the most, those in the south will likely see no improvement in pricing power.”

For the three regions with a favourable swing, IIFL estimates prices to increase 8-9% and correspondingly, Ebitda margins to rise 200-300bps by FY14. The company also believes that consensus estimates should see sustained upgrades.