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The seasonally weak monsoon quarter (July-Sept) will see cement sector margins drop to
Rs625-650/mt from Rs924/mt (April-June), in our view. Pricing fell by 8% in most markets
except South India in this monsoon quarter. Thus, we retain our cautious outlook.
Cement margins likely to fall to Rs625-650/mt in 2Q12, in our view
We expect the sequential fall in cement realisation and muted dispatches to put pressure on
margins. As a result, we expect the industry’s margins to fall to Rs625-650 per metric tonne
(/mt) in the July-Sept quarter from Rs924/mt in the April-June quarter. However, we believe
margins will be higher than the Rs386/mt seen in same quarter last year. We expect the
2Q12 (July-Sept) margins of South India-based companies to be higher at Rs950/mt due to
production discipline. Margins of these companies were only around Rs100/mt in 2Q11
compared to that of around Rs600/mt for companies with a pan-India presence.
We expect glut to persist but margins should recover in 2H12
We expect cement demand to pick up from now as the April-Sept half saw only 3% growth,
which could create some excitement in the sector. However, given the current macro
environment, the surplus situation could persist for longer – this being the second year with
cement demand growing below India’s GDP growth rate. Cement stocks have held up very
well through 1H2011 and the industry has been able to sustain healthy profitability trends.
We believe leading players must maintain a disciplined approach for the next two years to
help improve over-supply conditions. Cement prices started recovering in mid-September
and we expect margins to improve led by an effective increase in cement prices of Rs5-
10/bag from 1 October and our anticipated improvement in demand growth in 2H12.
Buy Grasim, India Cements and neutral on ACC
We recently upgraded ACC to Hold. ACC is seeing strong above-industry average volume growth
of 10% in FY12F, after a gap of three years (2.3% volume CAGR in the last three years). Our
forward estimates of ACC’s valuations, at US$123 EV/mt (close to replacement cost) suggest it is
cheaper than Ambuja Cements, which trades at US$164 EV/mt. We continue to believe that India
Cements (trading at FY12F US$65 EV/mt) and Grasim Industries (trading at FY12F EV/EBITDA
of 4x) offer value. We expect cement margins to touch Rs750-800/mt over the next two years. At
the current green field capital cost of US$120/mt, we believe Rs750-800/mt would be the
minimum level of margins for new capacity to breakeven.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The seasonally weak monsoon quarter (July-Sept) will see cement sector margins drop to
Rs625-650/mt from Rs924/mt (April-June), in our view. Pricing fell by 8% in most markets
except South India in this monsoon quarter. Thus, we retain our cautious outlook.
Cement margins likely to fall to Rs625-650/mt in 2Q12, in our view
We expect the sequential fall in cement realisation and muted dispatches to put pressure on
margins. As a result, we expect the industry’s margins to fall to Rs625-650 per metric tonne
(/mt) in the July-Sept quarter from Rs924/mt in the April-June quarter. However, we believe
margins will be higher than the Rs386/mt seen in same quarter last year. We expect the
2Q12 (July-Sept) margins of South India-based companies to be higher at Rs950/mt due to
production discipline. Margins of these companies were only around Rs100/mt in 2Q11
compared to that of around Rs600/mt for companies with a pan-India presence.
We expect glut to persist but margins should recover in 2H12
We expect cement demand to pick up from now as the April-Sept half saw only 3% growth,
which could create some excitement in the sector. However, given the current macro
environment, the surplus situation could persist for longer – this being the second year with
cement demand growing below India’s GDP growth rate. Cement stocks have held up very
well through 1H2011 and the industry has been able to sustain healthy profitability trends.
We believe leading players must maintain a disciplined approach for the next two years to
help improve over-supply conditions. Cement prices started recovering in mid-September
and we expect margins to improve led by an effective increase in cement prices of Rs5-
10/bag from 1 October and our anticipated improvement in demand growth in 2H12.
Buy Grasim, India Cements and neutral on ACC
We recently upgraded ACC to Hold. ACC is seeing strong above-industry average volume growth
of 10% in FY12F, after a gap of three years (2.3% volume CAGR in the last three years). Our
forward estimates of ACC’s valuations, at US$123 EV/mt (close to replacement cost) suggest it is
cheaper than Ambuja Cements, which trades at US$164 EV/mt. We continue to believe that India
Cements (trading at FY12F US$65 EV/mt) and Grasim Industries (trading at FY12F EV/EBITDA
of 4x) offer value. We expect cement margins to touch Rs750-800/mt over the next two years. At
the current green field capital cost of US$120/mt, we believe Rs750-800/mt would be the
minimum level of margins for new capacity to breakeven.
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