Q3FY2012 Cement earnings review ::ShareKhan PDF Link

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Q3FY2012 Cement earnings review  

The Q3FY2012 earnings growth of the domestic cement players was impressive and ahead of the Street's estimates. The companies with a larger exposure to south India saw a significant improvement in their bottom line during the quarter, as their realisation surged due to a supply discipline followed by the manufacturers in the region. On the other hand, after a sluggish offtake during H1FY2012 the cement offtake witnessed signs of a revival in Q3FY2012. Hence, the impact of the cost pressure during Q3FY2012 was largely offset by the healthy realisation for most of the companies. Consequently, we have upgraded our earnings estimates for most of the cement companies under our coverage to factor in the better than expected cement realisation and the improvement in the cement offtake. Going ahead, with the price hike undertaken in January this year, we believe cement companies are expected to post better profitability and earnings in the coming quarter. Our top pick in the sector is Grasim Industries (Grasim) in the large-cap space on account of its strong balance sheet, better profitability in the viscose staple fibre (VSF) business and attractive valuation. In the mid-cap space we prefer Orient Paper & Industries (Orient Paper) due to its diversified business model, improving market mix in favour of the non-southern regions and attractive valuation. 

Key points

• Cumulative revenue grew by 20.8%: In the quarter under review, the cumulative revenues of the cement companies under Sharekhan's universe grew by 20.8% year on year (YoY) to Rs17,606.7 crore. The revenue growth was supported by the realisation growth of 18.2% YoY and the volume growth of 10.2% YoY. Among the Sharekhan cement universe, Shree Cement, Orient Paper and Madras Cement posted a revenue growth of above 25% YoY. On the other hand, the revenue of the other companies grew by 18-20%. Large players like Ambuja Cement posted an impressive revenue growth of 30.2% whereas the revenues of ACC grew by 27.8% during the same quarter. 
• Mixed volume growth of cement universe, Orient Paper takes the lead: The cement companies under our coverage posted a mixed volume growth during the quarter. Orient Paper reported a volume growth of 25% due to the stabilisation of its new capacity and the revival in the demand for cement. On the other hand, JP Associates Ltd (JAL) and Madras Cement also posted an impressive volume growth in the range of 16-18%. Companies like UltraTech Cement (UltraTech), Shree Cement and India Cements, however, posted a volume growth of 7-9%. The pan-India large players like ACC and Ambuja Cement reported a volume growth in the range of 6-7%. 
• Cumulative realisation increased by 18.2%, supported by supply discipline: The cumulative realisation of the cement makers under our coverage increased by 18.2% YoY in the quarter. The cumulative growth in the realisation was supported by the supply discipline followed by the cement players. The average realisation of Shree Cement and Orient Paper increased by 33% and 20.7% respectively whereas the average realisation of the other players increased by 10-15%. Further, the cement prices increased by Rs10-12 per bag during January this year which will be reflected in the coming quarters. 
• Cost pressure offset by surge in realisation, margin expanded: On the operating profit margin (OPM) front, the cumulative OPM of these cement companies expanded by 48 basis points to 22% during the quarter under review. Shree Cement, India Cements and Madras Cement reported a healthy improvement in their OPM whereas the margin improvement was comparatively lower in case of UltraTech and Grasim. The margin expanded on the back of a surge in the realisation which offset the cost pressure in terms of an increase in the power & fuel cost (due to a rise in the coal price YoY) and a higher freight cost (due to an increase in the lead distance). On the other hand, players like JAL and Orient Paper reported contraction of 150-400 basis points in their margin. However, in the coming quarters we believe the margins would improve sequentially due to the recent increase in the cement prices.
• Earnings improved by 46.1% due to revenue growth and margin expansion: The revenue growth (supported by the realisation and volume growth) coupled with the margin expansion resulted in a better than expected earnings growth during the quarter. Further, the impressive performance of the non-cement division of JAL also supported the overall earnings growth. On a cumulative basis, the Sharekhan cement universe registered a 46.1% growth at the net profit level

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