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CEMENT
Cement prices started witnessing improvement by end of Q2FY12 while
demand continued to remain sluggish. Though demand growth witnessed
an improvement in the month of November on some improvement in the
construction activity and also due to base effect, overall demand growth
stood at 4.8% from Apr-Nov, 2011. However, cement prices firmed up during
Oct-Nov, 2011 primarily on account of supply discipline. Prices started
coming off from the highs during December. However, average prices
during Q3FY12 would be higher by Rs 15-18 per bag sequentially.
Thus, on a sequential basis, cement realizations for companies are likely to
improve during Q3FY12. We expect revenues in our coverage universe to
grow by 5.6% on QoQ basis and 14.3% on YoY basis. Operating margins are
expected to improve sequentially and on yearly basis due to improvement in
cement prices and net profit during Q3FY12 is expected to grow by 36%
QoQ and 18% YoY led by improvement in realizations and margins.
We expect full year demand to grow by nearly 6% during FY12 led by
revival in construction activity. We also expect cement demand to recover by
10% during FY13 subject to sustained recovery in the infrastructure and real
estate sector. However, we believe that this growth would still not be
sufficient to absorb higher supplies. We thus continue to maintain our
cautious stance on the sector and would only recommend players which are
available at attractive valuations. Our top pick in the cement sector is
Grasim industries.
Demand growth during Q3FY12
During Q3FY12, cement demand witnessed an improvement in select regions mainly
due to improvement in construction activity in states like Gujarat, MP and also preelection
spending in some parts of northern region. Road and building related contracts
continue to witness increased traction which is driving cement consumption.
However, demand from real estate has not witnessed significantly. Dispatches in
south were impacted by monsoons in Tamil Nadu and coastal AP. We expect full
year demand to grow by nearly 6% during FY12 led by revival in construction activity.
Demand growth in FY13 and onwards would be subject to sustained recovery in
infrastructure and real estate sector.
Cost pressures are likely to remain at similar levels of Q2FY12
but rupee depreciation may play spoilsport
Overall costs are likely to remain at similar levels of Q2FY12. Freight costs have remained
largely same during Q3FY12 while imported coal prices have witnessed a
decline. However, corresponding rupee depreciation may play a spoilsport. Going
forward, domestic coal prices may increase due to change in pricing methodology by
Coal India. Along with this, companies having captive power units located in
Maharashtra may now have to shelve out excess duty per unit for power generated
from their captive power units. State has increased the maximum duty payable to
150 paise per unit from 40 paise earlier and this will reduce the cost advantage of Rs
1-1.5 per unit which these companies were enjoying on captive power plants as
against power bought from state distribution companies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CEMENT
Cement prices started witnessing improvement by end of Q2FY12 while
demand continued to remain sluggish. Though demand growth witnessed
an improvement in the month of November on some improvement in the
construction activity and also due to base effect, overall demand growth
stood at 4.8% from Apr-Nov, 2011. However, cement prices firmed up during
Oct-Nov, 2011 primarily on account of supply discipline. Prices started
coming off from the highs during December. However, average prices
during Q3FY12 would be higher by Rs 15-18 per bag sequentially.
Thus, on a sequential basis, cement realizations for companies are likely to
improve during Q3FY12. We expect revenues in our coverage universe to
grow by 5.6% on QoQ basis and 14.3% on YoY basis. Operating margins are
expected to improve sequentially and on yearly basis due to improvement in
cement prices and net profit during Q3FY12 is expected to grow by 36%
QoQ and 18% YoY led by improvement in realizations and margins.
We expect full year demand to grow by nearly 6% during FY12 led by
revival in construction activity. We also expect cement demand to recover by
10% during FY13 subject to sustained recovery in the infrastructure and real
estate sector. However, we believe that this growth would still not be
sufficient to absorb higher supplies. We thus continue to maintain our
cautious stance on the sector and would only recommend players which are
available at attractive valuations. Our top pick in the cement sector is
Grasim industries.
Demand growth during Q3FY12
During Q3FY12, cement demand witnessed an improvement in select regions mainly
due to improvement in construction activity in states like Gujarat, MP and also preelection
spending in some parts of northern region. Road and building related contracts
continue to witness increased traction which is driving cement consumption.
However, demand from real estate has not witnessed significantly. Dispatches in
south were impacted by monsoons in Tamil Nadu and coastal AP. We expect full
year demand to grow by nearly 6% during FY12 led by revival in construction activity.
Demand growth in FY13 and onwards would be subject to sustained recovery in
infrastructure and real estate sector.
Cost pressures are likely to remain at similar levels of Q2FY12
but rupee depreciation may play spoilsport
Overall costs are likely to remain at similar levels of Q2FY12. Freight costs have remained
largely same during Q3FY12 while imported coal prices have witnessed a
decline. However, corresponding rupee depreciation may play a spoilsport. Going
forward, domestic coal prices may increase due to change in pricing methodology by
Coal India. Along with this, companies having captive power units located in
Maharashtra may now have to shelve out excess duty per unit for power generated
from their captive power units. State has increased the maximum duty payable to
150 paise per unit from 40 paise earlier and this will reduce the cost advantage of Rs
1-1.5 per unit which these companies were enjoying on captive power plants as
against power bought from state distribution companies.
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