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Five bullish arguments: Point & counter-point
Our recent interactions with investors indicate a growing optimism on the sector
fundamentals. We do not believe that worst is still over for the sector and see
demand-supply mismatch to continue. This would keep industry utilisation rates
under pressure in the next 15-18 months despite our expectation of a pick up in
demand to 10%. While cement prices appear resilient, in isolation, we note that
the hikes have not even been sufficient to offset increased pressure in costs, as
evident from a 30-35% lower Ebitda/t. We maintain our cautious sector stance
and remain negative on majors (ACC, Ambuja, UltraTech).
Bullish #1: Concerns on capacity surpluses are behind
q A lot of investors believe that additions have peaked; while we too expect annual
name-plate additions to moderate to 22mt in FY12-13 (cf. 30mt+ over FY09-11)…
q … annual effective capacities (adjusting for timings/ ramp-ups) would still rise 30mt
and would exceed incremental demand even in FY13.
q This is despite building in a pick up in demand to 10% over the next 2-3 years.
q Annual industry utilisations would therefore average at ~75% over FY12-13 before
inching up during 2HFY14 to 82%+ levels, which is 24-months away from now.
Bullish #2: Prices have been remarkably stable despite capacity surpluses
q Despite deterioration in industry utilisation rates, cement prices have been resilient.
For example, current national average prices are close to all time high despite weak
demand-supply equation.
q While the producer discipline has helped prices, we note that cost pressures (coal,
freight etc.) have also been an important driver of price hikes.
q This is evident from that Ebitda/t which is down 30-35% from FY10 peak levels.
q In this context, it is important to note that despite better than expected cement
prices, current consensus estimates are 7-13% lower than last year.
Bullish #3: Setting up capacity is increasingly becoming cumbersome
q Recent interactions with players indicate that barriers to entry are rising in cement
(land acquisition, clearances) which is also driving optimism for existing capacities.
q While from a longer term perspective, the entry barriers are rising, we believe that
it may not be relevant in the medium term.
q For example, despite assuming a 10% growth till FY15, industry utilisation rates
would be well below 90% on our estimates.
q Additionally, there are still brownfield potential at existing plants (difficult to
quantify, though) and hence, additions in the medium term may continue and
barriers to entry may not be relevant.
q For example, UltraTech is currently executing two projects aggregating to 9.2mtpa
which would likely come up in next 2-3 years.
Bullish #4: Return ratios in cement business are very high
q A lot of investors are impressed with the 14-15% RoEs generated by the ACCAmbuja
despite the downcyle.
q While we note that the current price-to-book at 2.6-2.7x clearly appear expensive
in the context of moderate returns generated by the majors…
q … we also note that the RoEs for these are also boosted by lower past capex and
depreciated asset base.
q For example, gross block per tonne for majors are 35-40% lower than greenfield
while net block are 55-60% lower than greenfield.
q Assuming these players set up a greenfield cement capacity at US$120-140/t, this
would generate 6-8% return ratios in the next two years.
Bullish #5: CCI concerns too are behind
q Following the media reports on Ministry of Corporate Affairs indicating there are no
initial signs of cartel, investors believe that the enquiry is already over.
q We however highlight that the in one of the recent interviews, member of CCI has
indicated that CCI is still examining the case against cement players and would
come out with its report in next 3-4 months.
Maintain cautious sector stance; negative recs on cement majors
q We remain concerned and expect pressures to continue in the medium term.
q We retain our negative ratings on cement majors, ACC, Ambuja and UltraTech.
Interview with CCI member on 12-Sep-11
Q: Before we talk further about this DLF instance, just want to ask you a question about whether
similar lines of probe are being examined for cement companies. We have been hearing that the
competition commission has pulled up companies like ACC , Gujarat Ambuja and Ultratech Cement for
manipulation of cement prices. Can you just elaborate or tell us what the stance is there?
A: There are complaints against these cement companies that they have formed a cartel but the matter is still
under investigation, nothing concrete has come as yet.
Q: But you do confirm that you are investigating some of these large cement companies on
allegations of price fixing?
A: Yes we are looking into price fixing cartelization.
Q: At this point, even though you said a formal note is not in place, would it be easy to prove this kind
of price fixing or price manipulation because the criticism is that there is no clear or concrete
evidence that these cement companies has formed a cartel. Would you say that you have concrete
information or evidence to that regard?
A: The matter is still under examination and it will be premature to say anything. The matter is still in the enquiry
stage so we can’t say anything. There can be circumstantial evidence or direct evidence. We are examining it and
let us see when it arises.
Q: Could you give us a sense of the potential penalty that you would be looking at for some of these
cement companies?
A: Cartels all over the world are heavily fined by competition commission. If you are able to establish a cartel,
then there has to be a heavy fine. We have to follow the same practice. Cartelization and fixing prices amount to
cheating the consumers, which amounts to theft. So that has to be heavily penalized. We have not arrived at any
conclusions as everything is premature at this stage.
Q: By when do you think you will be able to come out with a final order on this cement probe?
A: A couple of months, maybe three months.
Source: CNBC/ moneycontrol.com
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Five bullish arguments: Point & counter-point
Our recent interactions with investors indicate a growing optimism on the sector
fundamentals. We do not believe that worst is still over for the sector and see
demand-supply mismatch to continue. This would keep industry utilisation rates
under pressure in the next 15-18 months despite our expectation of a pick up in
demand to 10%. While cement prices appear resilient, in isolation, we note that
the hikes have not even been sufficient to offset increased pressure in costs, as
evident from a 30-35% lower Ebitda/t. We maintain our cautious sector stance
and remain negative on majors (ACC, Ambuja, UltraTech).
Bullish #1: Concerns on capacity surpluses are behind
q A lot of investors believe that additions have peaked; while we too expect annual
name-plate additions to moderate to 22mt in FY12-13 (cf. 30mt+ over FY09-11)…
q … annual effective capacities (adjusting for timings/ ramp-ups) would still rise 30mt
and would exceed incremental demand even in FY13.
q This is despite building in a pick up in demand to 10% over the next 2-3 years.
q Annual industry utilisations would therefore average at ~75% over FY12-13 before
inching up during 2HFY14 to 82%+ levels, which is 24-months away from now.
Bullish #2: Prices have been remarkably stable despite capacity surpluses
q Despite deterioration in industry utilisation rates, cement prices have been resilient.
For example, current national average prices are close to all time high despite weak
demand-supply equation.
q While the producer discipline has helped prices, we note that cost pressures (coal,
freight etc.) have also been an important driver of price hikes.
q This is evident from that Ebitda/t which is down 30-35% from FY10 peak levels.
q In this context, it is important to note that despite better than expected cement
prices, current consensus estimates are 7-13% lower than last year.
Bullish #3: Setting up capacity is increasingly becoming cumbersome
q Recent interactions with players indicate that barriers to entry are rising in cement
(land acquisition, clearances) which is also driving optimism for existing capacities.
q While from a longer term perspective, the entry barriers are rising, we believe that
it may not be relevant in the medium term.
q For example, despite assuming a 10% growth till FY15, industry utilisation rates
would be well below 90% on our estimates.
q Additionally, there are still brownfield potential at existing plants (difficult to
quantify, though) and hence, additions in the medium term may continue and
barriers to entry may not be relevant.
q For example, UltraTech is currently executing two projects aggregating to 9.2mtpa
which would likely come up in next 2-3 years.
Bullish #4: Return ratios in cement business are very high
q A lot of investors are impressed with the 14-15% RoEs generated by the ACCAmbuja
despite the downcyle.
q While we note that the current price-to-book at 2.6-2.7x clearly appear expensive
in the context of moderate returns generated by the majors…
q … we also note that the RoEs for these are also boosted by lower past capex and
depreciated asset base.
q For example, gross block per tonne for majors are 35-40% lower than greenfield
while net block are 55-60% lower than greenfield.
q Assuming these players set up a greenfield cement capacity at US$120-140/t, this
would generate 6-8% return ratios in the next two years.
Bullish #5: CCI concerns too are behind
q Following the media reports on Ministry of Corporate Affairs indicating there are no
initial signs of cartel, investors believe that the enquiry is already over.
q We however highlight that the in one of the recent interviews, member of CCI has
indicated that CCI is still examining the case against cement players and would
come out with its report in next 3-4 months.
Maintain cautious sector stance; negative recs on cement majors
q We remain concerned and expect pressures to continue in the medium term.
q We retain our negative ratings on cement majors, ACC, Ambuja and UltraTech.
Interview with CCI member on 12-Sep-11
Q: Before we talk further about this DLF instance, just want to ask you a question about whether
similar lines of probe are being examined for cement companies. We have been hearing that the
competition commission has pulled up companies like ACC , Gujarat Ambuja and Ultratech Cement for
manipulation of cement prices. Can you just elaborate or tell us what the stance is there?
A: There are complaints against these cement companies that they have formed a cartel but the matter is still
under investigation, nothing concrete has come as yet.
Q: But you do confirm that you are investigating some of these large cement companies on
allegations of price fixing?
A: Yes we are looking into price fixing cartelization.
Q: At this point, even though you said a formal note is not in place, would it be easy to prove this kind
of price fixing or price manipulation because the criticism is that there is no clear or concrete
evidence that these cement companies has formed a cartel. Would you say that you have concrete
information or evidence to that regard?
A: The matter is still under examination and it will be premature to say anything. The matter is still in the enquiry
stage so we can’t say anything. There can be circumstantial evidence or direct evidence. We are examining it and
let us see when it arises.
Q: Could you give us a sense of the potential penalty that you would be looking at for some of these
cement companies?
A: Cartels all over the world are heavily fined by competition commission. If you are able to establish a cartel,
then there has to be a heavy fine. We have to follow the same practice. Cartelization and fixing prices amount to
cheating the consumers, which amounts to theft. So that has to be heavily penalized. We have not arrived at any
conclusions as everything is premature at this stage.
Q: By when do you think you will be able to come out with a final order on this cement probe?
A: A couple of months, maybe three months.
Source: CNBC/ moneycontrol.com
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