Cement Sector -Dec 2011 Update: Centrum

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Cement Sector

Low base of last year to result in strong despatches growth in November ‘11

Top three players (ACC, Ambuja and UltraTech) in the Indian cement industry have cumulatively reported 16.1% YoY despatches growth for the month of November ’11 benefitting from the low base of last year. Last year, the despatches declined 19.8% MoM in November ‘10 after posting a robust 20.4% YoY growth in October ’10. We believe the industry will report ~15% despatches growth in the month and maintain our growth assumption of 5.5% for FY12E. The industry will have to grow at ~8.6% between Dec ’11- Mar ’12 to achieve the growth rate we forecasted. Cement prices have started improving post monsoon and pan- India average increased by ~8% to Rs270/bag in the last two months in expectation of demand revival in 2HFY12E. We do not foresee a steep hike in cement prices from current levels and maintain our cautious stance on the sector considering a sluggish demand scenario (housing construction activities and real estate sector are under pressure). We maintain Sell on ACC, Ambuja and Ultra Tech considering expensive valuations. We have a hold rating on Grasim and Shree Cement and Buy on mid-cap stocks including India Cements, JK Cement and Orient Paper & Industries.

m  Steep volume growth of top three players: Top three players of Indian cement industry cumulatively recorded 16.1% YoY volume growth in November ’11 benefitting from the low base of last year. Ambuja Cements recorded 29.2% YoY (and 2.8% MoM) growth in despatches to 1.83mt. UltraTech and ACC’s despatches grew 16.3% YoY and 5.2% YoY to 3.09mt and 1.83mt respectively.

m  November ’11 despatches growth could be ~15%: We believe that industry despatches for the month of November ’11 could be ~15% considering the stellar volume growth of top three players who control ~35% market share of cement industry. The primary reason for a steep growth is the low base of last year as in November ’10, industry’s volume had declined 19.8% MoM after a 20.4% YoY growth in October ’10.

m  Cement prices increase post-monsoon: Dealer interactions reveal that pan- India average cement prices have increased by ~8% to Rs270/bag over the last two months in expectation of demand revival in 2HFY12E. Average price in North, Central and East regions increased by 10-13% in the last two months, while in South and West regions it increased by 3-4%. We do not foresee a steep hike in cement prices from current levels and maintain our cautious stance on the sector considering the sluggish demand scenario (housing construction activities and real estate sector are under pressure).

m  Maintain Sell on large caps; prefer mid-caps due to attractive valuations: We maintain Sell rating on large cement companies (ACC, Ambuja and UltraTech) considering the expensive valuations. We maintain Hold rating on Grasim and Shree Cement and Buy on mid-caps under our coverage (India Cement, Orient Paper & Industries and JK Cement).