Cement Sector Robust despatches growth continues in February; valuations rolled forward to FY14 ::Centrum

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Cement Sector

Robust despatches growth continues in February; valuations rolled forward to FY14

The Cement industry posted 9.9% YoY (and 0.2% MoM) growth in despatches in the month of February 2012 led by higher despatches in the West and Central regions. This is the fifth consecutive month when the industry’s despatches growth has been in excess of 9%. Q4 is typically the strongest period for cement demand growth as construction activities are at its peak during the period and the industry growth is expected to be ~8% in Q4FY12E against 5.6% YoY recorded till December 2011 (Q1-Q3FY12). The YTD growth for the industry stands at 6.5% against 4.8% YoY in the same period last year. Going forward, we expect the industry to grow by 6% YoY in March 2012 and 8% in FY13E.  Though we expect an improvement in demand growth in FY13E and FY14E, the utilization rate of the industry is expected to remain at 74% and 77% in FY13E and FY14E due to persistent glut in the industry. We have rolled forward the valuation multiple to FY14E and based on this, maintain Sell on large players (ACC, Ambuja and Ultra Tech) and Hold on Grasim and Shree Cement. We maintain Buy on mid-cap cement players under our coverage (India Cements, Orient Paper and JK Cement).

m  Ambuja outshines other major companies under our coverage: Ambuja Cements’ despatches grew 12.7% YoY in Feb ’12 against 9.9% YoY of the industry, 7.5% YoY of ACC and 5.6% YoY of Ultra Tech. YTD despatches growth of ACC stands at 10.9%, Ambuja at 5% and Ultra Tech at 3.1% in FY12E against 6.5% YTD of the industry.

m  Prices continue to rise in the West region; an increase is expected in other regions: Cement prices continue to remain firm in the West and Central regions with price in Mumbai at Rs290-300/bag and in the South region at Rs290-295/bag. In the North region, price in Delhi is at Rs250-255/bag and in the East region, in Kolkata it is at Rs320-330/bag. Cement players are planning to increase the price by Rs8-10/bag to offset recent 20% hike in railway freight charges. All-India average retail price stands at Rs290/bag as of now.

m  Rolling forward valuation multiple to FY14E: We have rolled forward the valuation multiple of our coverage universe to FY14E. Though we expect revival in cement demand going forward in FY13E and FY14E, we believe that the players who have commissioned capacities will gain more than the large players. We believe that the valuations for large players under our coverage is expensive at 9-10x FY14E EV/EBITDA and maintain Sell on ACC, Ambuja and Ultra Tech. We maintain Hold on Grasim industries and Shree Cement. We like mid-cap cement stocks under our coverage and maintain Buy on India Cements, Orient Paper and JK Cement.

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