Please Share::
India Equity Research Reports, IPO and Stock NewsVisit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily10042012.pdf
Cement
India
4QFY12E: Accruing the benefits of seasonal price actions. Cement companies will
improve profitability by Rs240/ton sequentially, benefiting from (1) higher realizations as
average cement prices improve ~Rs10/bag, (2) improved volumes as we step into the
peak construction season, and (3) lower impact of cost pressures that will likely impact
fully by 1QFY13E. Cement stocks are building a very optimistic scenario for
improvement in profitability (+Rs400/ton) over the next 12 months, preventing us from
taking a constructive view at current levels.
Strong quarter, driven by robust pricing environment and demand uptick
We estimate a strong 29% sequential (16% yoy) jump in profitability for our coverage universe
driven by (1) 5% sequential increase in realizations as average cement prices increase by
~Rs9-10/bag sequentially, (2) strong volume growth (14% qoq, 6% yoy) driven by a demand
uptick witnessed since November 2011, and (3) reduction in total input cost (-1% qoq) primarily
on account of leverage benefits from higher volumes. We note that post monsoon months, the
industry has witnessed a healthy demand trend (including South India) clocking an average growth
of 14% yoy in the four-month period from November 2011 to February 2012. In our view, the
demand uptick has been primarily driven by (1) low base effect, (2) commencement of
construction activity in South India (especially AP), and (3) state assembly elections concluded in
February 2012.
Prices hiked yet again, though pricing action traditionally peaks by March
Cement prices were hiked by Rs18-20/bag in March 2012 across regions with South India
witnessing the maximum increase of Rs20-25/bag. The price rise comes in wake of (1) increase in
railway freight by Indian Railways, and (2) healthy demand trend witnessed in the past few months.
We however note that pricing action has historically been maximized in the March quarter (see
Exhibit 3). We further highlight that the underutilization of capacities is likely to continue even in
FY2013E despite factoring 8% consumption growth. A weak demand environment coupled with a
continued capacity overhang could test once again the pricing discipline currently maintained by
the industry, besides potentially inviting the ire of the regulatory authorities.
Cost pressures unlikely to abate in near term – full impact likely by 1QFY13E
Cost pressures from coal, freight and raw material costs ate into the aggressive pricing gains in
FY2012 and continue to threaten profitability in FY2013E. Indian Railways has recently increased
rail freight by ~20-25% while the impending revision in diesel prices and rising prices of coal
(domestic as well as imported) could further weigh on input costs. We note that the full impact of
hike in railway freight would likely be apparent in 1QFY13E.
Valuations not reflecting underlying risk, maintain our cautious stance
Cement stocks have outperformed the benchmark BSE Sensex by 11% in the past three months.
In our view, the current multiples do not factor the potential earnings pitfalls from (1) prolonged
demand-supply imbalance which could hurt the pricing discipline, and (2) impending hike in diesel
prices. We remain cautious on ACC, Ambuja and UltraTech though like India Cements on account
of steep valuation discounts compared to peers. We note that ICEM at 5.1X FY2013E EBITDA and
US$103/ton FY2013E production is trading at 45% and 43% discount respectively to average
trading multiples of ACC, Ambuja and UltraTech.
Strong sequential jump in profitability, leverage benefits from higher volumes
4QFY12E will likely see a 5% sequential increase in realizations (~Rs10/bag) and 14%
sequential increase in volumes. We discuss below our key assumptions for 4QFY12E.
` Volumes. We estimate volumes to increase 7% yoy driven by healthy demand trend
witnessed over the past two quarters. In our view, the demand uptick has been primarily
driven by (1) lower base last year, (2) commencement of construction activity in South
India (especially AP), and (3) state assembly elections concluded in February 2012.
` Realization. We factor a 5% sequential increase (~Rs9-10/bag) in average realization
driven by a sharp hike in prices in March. The price hike was sharpest in South India.
` Power and fuel cost. We estimate a 6% sequential increase in power and fuel cost
primarily on account of (1) revision in pricing structure by Coal India (and corresponding
inflation in e-auction rates), and (2) lag impact of weaker Rupee flowing in 4QFY12.
` Freight cost. We build a 5% sequential increase in freight cost to factor the increase in
rail freight rates by 25% in March 2012. We note that truck freight rates have remained
fairly stable during the quarter. We expect the full impact of increase in rail fright rates to
flow in 1QFY13E.
` Overheads. We estimate a 9% sequential decline in per ton overhead cost primarily on
account of leverage benefits of higher volumes in 4QFY12.
No comments:
Post a Comment