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CEMENT SECTOR UPDATE
Prices started recovering after seeing sharp fall during
Q2FY12
q Cement prices have started recovering in some markets after witnessing
sharp falls during June-Aug, 2011
q Demand growth revival is still lower than our expectations
q We tweak our demand growth estimates downwards due to lack of visibility
during FY12
q We continue to maintain cautious stance on cement sector due to lower
than expected demand growth and higher supplies.
Demand supply scenario
Cement demand has a correlation with GDP growth and has grown at 1.2-1.3x GDP
growth since 2005. But it has defied that correlation during FY11 and FY12 till date
due to lack of infrastructure activity as well as slowdown in real estate due to higher
interest rates. Cement to GDP ratio had in past remained in the range of 1.2x-1.3x
which could not be maintained during FY11 and FY12 till date. However, we expect
this trend to return from FY13 onwards due to revival expected in infrastructure creation.
GDP growth is expected to be around 8% going forward, we thus expect
cement demand to improve by 10% during FY13.
We had expected demand to revive during FY12 but delays in project award process
had resulted in 3.5% YTD growth in cement (Apr-Aug, 2011). Demand growth improvement
during H2FY12 would be led primarily by projects awarded during
Q1FY12 as well as better monsoons leaving higher disposable income with the farmers.
We had stated during Q1FY12 that it takes nearly 3-6 months for any infrastructure
award to translate into actual cement demand and any delay in awards would
shift the demand revival further by six months to FY13. Due to lower than expected
order inflows for the infrastructure sector, we have thus revised our demand growth
estimates downwards for FY12 and expect demand to revive by nearly 10% during
FY13. Focus on infrastructure creation as well as pre-election spend during FY13 and
FY14 would be key drivers for the cement demand growth going forward
Pricing scenario in different regions
Cement prices have started recovering in Sep, 2011 in anticipation of demand improvement
after witnessing sharp declines between June-Aug, 2011. During last
month, MCA had also directed Serious Fraud Investigation Office and CCI to probe
into cartelization by the cement companies. This may pose a risk for further price
rises given the fact that demand is growing slower than expected and oversupply
continues to prevail.
n North - Due to lack of demand growth, cement prices corrected by nearly Rs 10-
20 per bag during July, 2011 across various regions. Correction in cement prices
continued during Aug, 2011 also with further declines of Rs 10-15 per bag across
various regions. Demand continued to remain weak due to scrapping of land
acquisition in Greater Noida by Supreme Court which impacted real estate construction.
However, prices were increased by nearly Rs 10 per bag during Sep,
2011. The gap between trade and non-trade segment continued to remain high
n South - Prices continued to remain strong in the Southern region despite incremental
supplies as well as lack of demand growth. This was led primarily by the
pricing discipline exhibited by cement players. Prices remained stable during July
to Sep, 2011. Prices in southern region may start correcting with the onset of
monsoons coupled with addition in supplies from new players like JP Associates.
n East - Cement prices in the eastern region further slid in July, 2011 due to the
monsoons as well as lack of demand growth. Prices recovered marginally in August
in few regions and improved by Rs 10 per bag during Sep, 2011 but dealers
found it quite difficult to sustain cement prices at the current levels
n West - Western region was impacted by monsoons and cement prices declined
by nearly Rs 10-15 per bag during July, 2011. Decline was quite sharp in regions
like Ahmedabad, Nagpur and Nashik. Price hikes taken during month of August
and Sep, 2011 could not be sustained in these regions due to monsoons as well
as lack of demand. However, other regions in west witnessed improvement in
cement prices by nearly Rs 10 per bag during Sep, 2011.
Cost increases peaking out
Costs have witnessed a sharp increase in past few quarters led by higher coal prices,
higher freight and raw material expenses. Companies managed to improve EBITDA/
tonne during Q1FY12 due to steep price hikes witnessed between Jan-Apr, 2011.
However, going forward in the coming quarters we expect EBITDA/tonne to trend
downwards due to fall in the cement prices seen during Q2FY12 and costs remaining
at higher levels. We also believe that overall cost pressures in the sector would be
peaking out by Q2FY12.
Recommendation
We had expected earlier that cement price hikes undertaken during Q4FY11 on account
of supply discipline may remain sustainable only till Q1FY12 in absence of real
demand growth. Sharp price cuts witnessed during June-Aug, 2011 justify the same.
Demand growth continued to remain below our estimates which may keep the demand
supply gap wide for next 1.5-2 years. Though we expect demand growth to
improve in FY13 but we believe that demand growth will not be sufficient to absorb
surplus capacity.
We thus continue to maintain our cautious stance on the sector and would only recommend
players which are available at attractive valuations. Our top pick in the
cement sector is Grasim industries.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CEMENT SECTOR UPDATE
Prices started recovering after seeing sharp fall during
Q2FY12
q Cement prices have started recovering in some markets after witnessing
sharp falls during June-Aug, 2011
q Demand growth revival is still lower than our expectations
q We tweak our demand growth estimates downwards due to lack of visibility
during FY12
q We continue to maintain cautious stance on cement sector due to lower
than expected demand growth and higher supplies.
Demand supply scenario
Cement demand has a correlation with GDP growth and has grown at 1.2-1.3x GDP
growth since 2005. But it has defied that correlation during FY11 and FY12 till date
due to lack of infrastructure activity as well as slowdown in real estate due to higher
interest rates. Cement to GDP ratio had in past remained in the range of 1.2x-1.3x
which could not be maintained during FY11 and FY12 till date. However, we expect
this trend to return from FY13 onwards due to revival expected in infrastructure creation.
GDP growth is expected to be around 8% going forward, we thus expect
cement demand to improve by 10% during FY13.
We had expected demand to revive during FY12 but delays in project award process
had resulted in 3.5% YTD growth in cement (Apr-Aug, 2011). Demand growth improvement
during H2FY12 would be led primarily by projects awarded during
Q1FY12 as well as better monsoons leaving higher disposable income with the farmers.
We had stated during Q1FY12 that it takes nearly 3-6 months for any infrastructure
award to translate into actual cement demand and any delay in awards would
shift the demand revival further by six months to FY13. Due to lower than expected
order inflows for the infrastructure sector, we have thus revised our demand growth
estimates downwards for FY12 and expect demand to revive by nearly 10% during
FY13. Focus on infrastructure creation as well as pre-election spend during FY13 and
FY14 would be key drivers for the cement demand growth going forward
Pricing scenario in different regions
Cement prices have started recovering in Sep, 2011 in anticipation of demand improvement
after witnessing sharp declines between June-Aug, 2011. During last
month, MCA had also directed Serious Fraud Investigation Office and CCI to probe
into cartelization by the cement companies. This may pose a risk for further price
rises given the fact that demand is growing slower than expected and oversupply
continues to prevail.
n North - Due to lack of demand growth, cement prices corrected by nearly Rs 10-
20 per bag during July, 2011 across various regions. Correction in cement prices
continued during Aug, 2011 also with further declines of Rs 10-15 per bag across
various regions. Demand continued to remain weak due to scrapping of land
acquisition in Greater Noida by Supreme Court which impacted real estate construction.
However, prices were increased by nearly Rs 10 per bag during Sep,
2011. The gap between trade and non-trade segment continued to remain high
n South - Prices continued to remain strong in the Southern region despite incremental
supplies as well as lack of demand growth. This was led primarily by the
pricing discipline exhibited by cement players. Prices remained stable during July
to Sep, 2011. Prices in southern region may start correcting with the onset of
monsoons coupled with addition in supplies from new players like JP Associates.
n East - Cement prices in the eastern region further slid in July, 2011 due to the
monsoons as well as lack of demand growth. Prices recovered marginally in August
in few regions and improved by Rs 10 per bag during Sep, 2011 but dealers
found it quite difficult to sustain cement prices at the current levels
n West - Western region was impacted by monsoons and cement prices declined
by nearly Rs 10-15 per bag during July, 2011. Decline was quite sharp in regions
like Ahmedabad, Nagpur and Nashik. Price hikes taken during month of August
and Sep, 2011 could not be sustained in these regions due to monsoons as well
as lack of demand. However, other regions in west witnessed improvement in
cement prices by nearly Rs 10 per bag during Sep, 2011.
Cost increases peaking out
Costs have witnessed a sharp increase in past few quarters led by higher coal prices,
higher freight and raw material expenses. Companies managed to improve EBITDA/
tonne during Q1FY12 due to steep price hikes witnessed between Jan-Apr, 2011.
However, going forward in the coming quarters we expect EBITDA/tonne to trend
downwards due to fall in the cement prices seen during Q2FY12 and costs remaining
at higher levels. We also believe that overall cost pressures in the sector would be
peaking out by Q2FY12.
Recommendation
We had expected earlier that cement price hikes undertaken during Q4FY11 on account
of supply discipline may remain sustainable only till Q1FY12 in absence of real
demand growth. Sharp price cuts witnessed during June-Aug, 2011 justify the same.
Demand growth continued to remain below our estimates which may keep the demand
supply gap wide for next 1.5-2 years. Though we expect demand growth to
improve in FY13 but we believe that demand growth will not be sufficient to absorb
surplus capacity.
We thus continue to maintain our cautious stance on the sector and would only recommend
players which are available at attractive valuations. Our top pick in the
cement sector is Grasim industries.
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