Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Cement Sector
Still Early to Get Constructive; Grasim Top Pick
Cement stocks ahead of near-term fundamentals, we remain cautious — Cement
stocks have run up in the last three months largely on an upturn in cement prices due
to volume cutbacks by producers. Stocks have outperformed the Sensex by 11-29% in
the past three months and trade at EV/t of $137-157, Sep12 PE of 17-19x and
EV/EBITDA of 8.7-9.1x. Grasim (best relative value: P/E 8.7x, EV/EBITDA 5.6x)
continues to be our only Buy. Maintain Sell on Ambuja, UltraTech and ACC. Cement
prices have downside risk; a stock correction would offer better value.
Demand is sluggish so far — Demand trends so far have come in below
expectations. Domestic demand has risen only 3.4% yoy during Apr-Aug11, and with
faster growth for the remainder of the year, growth is likely to reach 8% in FY12.
Growth has been impacted by slower infrastructure spending, particularly in south India
and weak trends in some urban real estate markets.
Supply yet to be absorbed — India has been prolific in cement capacity addition with
93mtpa, an increase of 56% since FY08, more than double the cumulative demand
growth of 26% since then. Another 65m tpa (+31%) is expected during FY12-14E. The
industry is more consolidated than before (top 5 = 51% of capacity), but a long tail of
~30 players will make co-ordination difficult to sustain for long periods.
Prices set for a fall — The surge in capacity combined with slower demand led to a 5-
29% fall in regional prices from April to July 2011, with southern prices remaining
steady. Despite slower demand trends, prices have recovered most of the lost ground
since July 2011. The higher prices may sustain for a while, but with utilization levels at
~70-80%, we believe there is strong downside price risk.
Costs on an uptrend — Companies are also struggling with costs specifically for raw
materials (fly ash, slag), fuel (coal) and freight, especially those companies which
depend on imported coal (Ambuja, UltraTech). In our view, the cost pressures are likely
to continue as more capacities come on stream.
Grasim remains Buy; maintain Sell on ACC, Ambuja and UltraTech — We continue
to use replacement cost of US$120/t (in line with current capex trends) as our key
valuation tool. We might turn more positive, all things being equal, on a correction
below replacement costs. We believe there is an unjustified valuation dissonance with
Grasim – at a CY11E EV/t of US$82 and maintain Buy (1L). We see downside on Sellrated
Ambuja (EV/t of US$156), UltraTech (US$137) and ACC (US$132) – in that order.
Cement majors have outperformed the Sensex in the last 6-12 months, with the
biggest outperformance in the past three months (by 23-29%) largely on an upturn
in cement prices (artificial scarcity), under-ownership and the domestic nature of the
industry (unlike other commodities which get impacted by international
price/demand trends). While the structural long-term outlook is positive, valuations
seem to reflect that the cyclical pain is almost behind us.
In our opinion, stocks have run ahead of the near-term concerns and we remain
cautious on the sector. We believe valuations should be more balanced between
the structural and cyclical outlook, with an EV/t closer to replacement cost at
US$120. We continue to use replacement costs of US$120/t (in line with current
capex trends) as our primary value tool. Stocks should trend closer to replacement
cost over the next 3-6 months, and, all things being equal, we might become more
constructive on the stocks if they dip below this benchmark.
We maintain Sell on Ambuja, UltraTech, and ACC (in that order). These stocks trade
at an EV/t of between US$137-157, Sep12 PE of 17-19x, and EV/EBITDA of 8.7-
9.1x. We believe Grasim (at US$82 EV/t, 5.6x EV/EBITDA and 8.7x P/E on
Sep12E) looks cheap on an absolute and relative basis, and maintain Buy on the
stock. The lower valuation for Grasim could be due to a holding company discount
for its cement assets (more than is justified) and the diversified nature of its assets.
However, in our view, the steady nature of the VSF (Viscose Staple Fibre) business
should provide some near-term downside protection.
Near-Term Concerns on Sector
1. Demand sluggish — Demand has risen ~3.4% during April- August 2011, and
with faster growth for the remainder of the year, growth is likely to reach 8% in
FY12. Growth is being impacted by slower infrastructure spending (particularly in
South India) and weak trends in some urban real estate markets.
2. Supply yet to be absorbed — India has been prolific in cement capacity addition
with 93mtpa, an increase of 56% since FY08, more than double the cumulative
demand growth of 26% since then. Another 65mtpa (+31%) is expected during
FY12-14E. The industry is more consolidated than before (Top 5 = 51% of capacity)
but a long tail of ~30 players will make co-ordination difficult to sustain.
3. Prices set for a fall — The oversupply situation, combined with slower demand,
led to a 5-29% fall in regional prices from April to July 2011, with Southern prices
remaining steady. Despite sluggish demand trends, cement prices have recovered
most of the lost ground since Jul 2011 (reportedly due to artificial scarcity). The
higher prices may sustain for a while, but with utilization levels at ~70-80% we
believe there is downside price risk. We expect prices to remain firm in the near
term, but believe a correction is likely in the next 3-6 months.
4. Costs on an uptrend — Companies are also struggling with costs, specifically for
raw materials (fly ash, slag), fuel (coal), and freight. In our view, cost pressures are
likely to continue as more capacities come on stream.
5. SFIO Recommends Action — The Economic Times reported on 21Sep 2011,
that the Competition Commission of India (CCI) will start proceedings against
India’s top companies for abuse of market dominance and collaboration to jack up
prices, based on the report by The Serious Fraud Investigation Office (SFIO), which
is the investigation wing of the Ministry of Corporate Affairs. If the charges are
upheld, the CCI has the power to impose penalties.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Cement Sector
Still Early to Get Constructive; Grasim Top Pick
Cement stocks ahead of near-term fundamentals, we remain cautious — Cement
stocks have run up in the last three months largely on an upturn in cement prices due
to volume cutbacks by producers. Stocks have outperformed the Sensex by 11-29% in
the past three months and trade at EV/t of $137-157, Sep12 PE of 17-19x and
EV/EBITDA of 8.7-9.1x. Grasim (best relative value: P/E 8.7x, EV/EBITDA 5.6x)
continues to be our only Buy. Maintain Sell on Ambuja, UltraTech and ACC. Cement
prices have downside risk; a stock correction would offer better value.
Demand is sluggish so far — Demand trends so far have come in below
expectations. Domestic demand has risen only 3.4% yoy during Apr-Aug11, and with
faster growth for the remainder of the year, growth is likely to reach 8% in FY12.
Growth has been impacted by slower infrastructure spending, particularly in south India
and weak trends in some urban real estate markets.
Supply yet to be absorbed — India has been prolific in cement capacity addition with
93mtpa, an increase of 56% since FY08, more than double the cumulative demand
growth of 26% since then. Another 65m tpa (+31%) is expected during FY12-14E. The
industry is more consolidated than before (top 5 = 51% of capacity), but a long tail of
~30 players will make co-ordination difficult to sustain for long periods.
Prices set for a fall — The surge in capacity combined with slower demand led to a 5-
29% fall in regional prices from April to July 2011, with southern prices remaining
steady. Despite slower demand trends, prices have recovered most of the lost ground
since July 2011. The higher prices may sustain for a while, but with utilization levels at
~70-80%, we believe there is strong downside price risk.
Costs on an uptrend — Companies are also struggling with costs specifically for raw
materials (fly ash, slag), fuel (coal) and freight, especially those companies which
depend on imported coal (Ambuja, UltraTech). In our view, the cost pressures are likely
to continue as more capacities come on stream.
Grasim remains Buy; maintain Sell on ACC, Ambuja and UltraTech — We continue
to use replacement cost of US$120/t (in line with current capex trends) as our key
valuation tool. We might turn more positive, all things being equal, on a correction
below replacement costs. We believe there is an unjustified valuation dissonance with
Grasim – at a CY11E EV/t of US$82 and maintain Buy (1L). We see downside on Sellrated
Ambuja (EV/t of US$156), UltraTech (US$137) and ACC (US$132) – in that order.
Cement majors have outperformed the Sensex in the last 6-12 months, with the
biggest outperformance in the past three months (by 23-29%) largely on an upturn
in cement prices (artificial scarcity), under-ownership and the domestic nature of the
industry (unlike other commodities which get impacted by international
price/demand trends). While the structural long-term outlook is positive, valuations
seem to reflect that the cyclical pain is almost behind us.
In our opinion, stocks have run ahead of the near-term concerns and we remain
cautious on the sector. We believe valuations should be more balanced between
the structural and cyclical outlook, with an EV/t closer to replacement cost at
US$120. We continue to use replacement costs of US$120/t (in line with current
capex trends) as our primary value tool. Stocks should trend closer to replacement
cost over the next 3-6 months, and, all things being equal, we might become more
constructive on the stocks if they dip below this benchmark.
We maintain Sell on Ambuja, UltraTech, and ACC (in that order). These stocks trade
at an EV/t of between US$137-157, Sep12 PE of 17-19x, and EV/EBITDA of 8.7-
9.1x. We believe Grasim (at US$82 EV/t, 5.6x EV/EBITDA and 8.7x P/E on
Sep12E) looks cheap on an absolute and relative basis, and maintain Buy on the
stock. The lower valuation for Grasim could be due to a holding company discount
for its cement assets (more than is justified) and the diversified nature of its assets.
However, in our view, the steady nature of the VSF (Viscose Staple Fibre) business
should provide some near-term downside protection.
Near-Term Concerns on Sector
1. Demand sluggish — Demand has risen ~3.4% during April- August 2011, and
with faster growth for the remainder of the year, growth is likely to reach 8% in
FY12. Growth is being impacted by slower infrastructure spending (particularly in
South India) and weak trends in some urban real estate markets.
2. Supply yet to be absorbed — India has been prolific in cement capacity addition
with 93mtpa, an increase of 56% since FY08, more than double the cumulative
demand growth of 26% since then. Another 65mtpa (+31%) is expected during
FY12-14E. The industry is more consolidated than before (Top 5 = 51% of capacity)
but a long tail of ~30 players will make co-ordination difficult to sustain.
3. Prices set for a fall — The oversupply situation, combined with slower demand,
led to a 5-29% fall in regional prices from April to July 2011, with Southern prices
remaining steady. Despite sluggish demand trends, cement prices have recovered
most of the lost ground since Jul 2011 (reportedly due to artificial scarcity). The
higher prices may sustain for a while, but with utilization levels at ~70-80% we
believe there is downside price risk. We expect prices to remain firm in the near
term, but believe a correction is likely in the next 3-6 months.
4. Costs on an uptrend — Companies are also struggling with costs, specifically for
raw materials (fly ash, slag), fuel (coal), and freight. In our view, cost pressures are
likely to continue as more capacities come on stream.
5. SFIO Recommends Action — The Economic Times reported on 21Sep 2011,
that the Competition Commission of India (CCI) will start proceedings against
India’s top companies for abuse of market dominance and collaboration to jack up
prices, based on the report by The Serious Fraud Investigation Office (SFIO), which
is the investigation wing of the Ministry of Corporate Affairs. If the charges are
upheld, the CCI has the power to impose penalties.
No comments:
Post a Comment