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Cement (Reena Verma Bhasin, CFA)
Underweight
Key drivers of sector outlook
Unattractive risk-reward: Current sector valuations are at about 10-15%
premium versus replacement cost on EV/capacity basis. We believe valuations
already factor rational price behavior among industry majors and hence stable
RoEs. Based on supply-demand fundamentals, in our view there is more
downside than upside to current expectations.
Demand expected to recover: We expect strong demand recovery of about 9%
YoY in FY13 post two years of muted demand growth (about 4-5%). Our forecast
assumes strong recovery in infrastructure-led demand and modest recovery in
housing-led demand.
Capacity growth to continue; cement prices seem close to peak levels: We
estimate about 10-12% YoY rise in the industry’s cement capacity for both
FY12E & FY13E. Thus, the industry’s capacity utilization will remain low at about
71% in FY12-13E. Despite the high capacity overhang, cement prices across
India are up about 13% vs. FY11 levels, with the south witnessing the sharpest
increase. Unless demand recovery surprises, we believe the industry’s supplydemand
balance should exert downward pressure on prices.
Cost pressures unlikely to ease: Cement majors witnessed steep cost inflation
in 1H FY12. Energy costs remain a cost-push factor due to unreliable local coal
supplies and rupee’s depreciation.
Top Buy: None
Top stock pick: Grasim
Inexpensive valuations; holdco discount steeper than expected: Our sumof-
the-parts analysis indicates that the cement business of Grasim (listed parent
company of Ultratech) trades at about 45% discount to the current market price
of Ultratech and about 15% discount to our target price for Ultratech.
Lower downside to FY13E earnings vs. pure cement plays: We forecast
about 14% YoY decline in Grasim’s FY13 earnings vs. 15-25% decline for pure
cement majors. For Grasim’s VSF business, we expect modest (about 100bp)
margin compression in FY13 as the likely pressure on VSF prices may be partly
offset by declining pulp prices. UltraTech (cement) earnings are forecast to fall
25% YoY as UltraTech has high exposure (about 52%) to south and west India.
Debt-free despite large expansion plans: Grasim is expanding its VSF
capacity by about 50% and cement capacity by about 20% by FY14E. Despite
the large investment plans, consol. balance sheet has minimal debt.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cement (Reena Verma Bhasin, CFA)
Underweight
Key drivers of sector outlook
Unattractive risk-reward: Current sector valuations are at about 10-15%
premium versus replacement cost on EV/capacity basis. We believe valuations
already factor rational price behavior among industry majors and hence stable
RoEs. Based on supply-demand fundamentals, in our view there is more
downside than upside to current expectations.
Demand expected to recover: We expect strong demand recovery of about 9%
YoY in FY13 post two years of muted demand growth (about 4-5%). Our forecast
assumes strong recovery in infrastructure-led demand and modest recovery in
housing-led demand.
Capacity growth to continue; cement prices seem close to peak levels: We
estimate about 10-12% YoY rise in the industry’s cement capacity for both
FY12E & FY13E. Thus, the industry’s capacity utilization will remain low at about
71% in FY12-13E. Despite the high capacity overhang, cement prices across
India are up about 13% vs. FY11 levels, with the south witnessing the sharpest
increase. Unless demand recovery surprises, we believe the industry’s supplydemand
balance should exert downward pressure on prices.
Cost pressures unlikely to ease: Cement majors witnessed steep cost inflation
in 1H FY12. Energy costs remain a cost-push factor due to unreliable local coal
supplies and rupee’s depreciation.
Top Buy: None
Top stock pick: Grasim
Inexpensive valuations; holdco discount steeper than expected: Our sumof-
the-parts analysis indicates that the cement business of Grasim (listed parent
company of Ultratech) trades at about 45% discount to the current market price
of Ultratech and about 15% discount to our target price for Ultratech.
Lower downside to FY13E earnings vs. pure cement plays: We forecast
about 14% YoY decline in Grasim’s FY13 earnings vs. 15-25% decline for pure
cement majors. For Grasim’s VSF business, we expect modest (about 100bp)
margin compression in FY13 as the likely pressure on VSF prices may be partly
offset by declining pulp prices. UltraTech (cement) earnings are forecast to fall
25% YoY as UltraTech has high exposure (about 52%) to south and west India.
Debt-free despite large expansion plans: Grasim is expanding its VSF
capacity by about 50% and cement capacity by about 20% by FY14E. Despite
the large investment plans, consol. balance sheet has minimal debt.
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