Cement -- Dispatch growth surprises positively ::Religare

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Cement
Dispatch growth surprises positively
Cement dispatch numbers for October came in ahead of estimates, with large
players growing at 1.8% on average versus consensus expectations of negative
growth (over high base of 17% in Oct-10). JPA/SRCM led the way with a
13%/14.5% YoY surge in volumes. We continue to expect strong dispatch numbers
for the industry in H2FY12 given the low base, rural demand and pre-election
demand in few states. This in conjunction with the recent price hikes is likely to
support strong profitability for cement majors in the coming quarter. We like
UTCEM and ACEM in the large cap space, and SRCM and OPI among mid caps.
v October dispatch growth surprises positively: Despite the festive season (when
construction slows) and a high base for dispatches in October’10 (see table below),
cement majors reported volume growth of 1.8% (on average) versus street
expectations of negative growth. While ACC/ACEM reported growth of 2.6%/1.7%
YoY, JPA/SRCM registered an uptick of 13%/14.5%. UTCEM proved to be the only
laggard with a decline of 6.7%. We believe inventory build-up, strong rural offtake
and pre-election demand in some states propelled growth for the month.
v Low base to fuel growth: With the lower base of dispatch growth (YoY) coming
into play from November’11 to June’12 and commencement of the busy construction
season, we expect strong growth in industry dispatches in the coming months.
v Price hikes will further bolster profitability: Our dealer checks indicate an
increase in cement prices by Rs 10/bag in the central, northern and eastern regions
from 1 November. In the western market, Mumbai and Gujarat saw hikes of
Rs 10/bag and Rs 5/bag respectively. We note that demand has picked up sharply in
the central region and in Gujarat, while other regions are still resorting to production
discipline. Prices remain steady in the south. Dealers expect a further price hike of
Rs 10/bag within the next week in the northern, central and eastern regions, while the
south is likely to remain stable.
v Maintain positive view on the sector: We maintain our positive view on the sector
with ACEM and UTECM as our top picks in the large cap space and SRCM and OPI
preferred among mid caps. Given that we expect a strong financial performance in
H2FY12, mid cap stocks such as SRCM, BCORP, OPI and JKLC are likely to
outperform as the valuation gap between large and mid caps has widened now