Cement - Q4FY12 Result Preview : Centrum

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Q4FY12 Result Preview

Cement

Pricing strong but margins under pressure

We expect aggregate sales volumes of our cement universe to grow 8.5% YoY (and 15.8% QoQ) to 33.2mt driven by strong cement demand across the country due to busy construction activities in the quarter. Average cement realization is expected to improve 10.8% YoY (and 1.2% QoQ) to Rs4,027/tonne led by sharp price hikes during Q1 and Q2 of FY12E. Though volume and realization are expected to increase, rising costs would lead to a marginal 4bps contraction in average EBITDA margin of our universe. Industry despatches during the quarter is expected to increase 8.3% YoY to 63.1mt.  Though the manufacturers are able to pass on the rising costs to consumers, we are not expecting margin expansion in the near future due to rising costs for players. Slowdown in housing and real estate construction activities along with economic slowdown which has kept capex cycle of industries under pressure remain a concern for sustainable demand growth. We believe that large-cap cement companies (ACC, Ambuja and Ultra Tech) are trading at a premium to their historical valuations and maintain Sell on these stocks. We have a Hold rating on Grasim Industries and Shree Cement. We prefer mid-caps and have a Buy on Orient Paper, India Cements and JK Cement due to attractive valuations.

m  Strong volume growth in the seasonally best quarter: Aggregate sales volume of our coverage universe is expected to grow 8.5% YoY (and 15.8% QoQ) driven by strong construction activities (Q4 is seasonally the best quarter for cement companies). Large cement players’ volume is expected to grow by 7-9% YoY. We expect 14.5% YoY and 12.1% YoY volume growth for Shree Cement and Orient Paper respectively in the quarter. 
m  Steep increase in realization expected: Average realization of cement for our coverage universe is expected to increase 10.8% YoY (and 1.2% QoQ) to Rs4,027/tonne primarily due to sharp price hikes taken during Q1 and Q2 of FY12E.
m  Cost pressure will lead to marginal decline in operating margins: Though the realization and volume of our universe is expected to increase, average operating margin of our universe is expected to decline marginally by 4bps to 22.4%. Among large cement players, ACC is expected to report the highest margin decline of 183bps YoY. Among mid-caps, we expect margin improvement of 320bps each for India Cements and JK Cement.
m  Prefer mid-caps due to attractive valuations: Large-cap cement companies are trading at a premium to their mean trading multiples, which we believe is unwarranted considering the weak demand environment, expected volatility in realization and decline in return ratios. We maintain Sell on ACC, Ambuja and UltraTech. We have a Hold rating on Grasim Industries and Shree Cement. We maintain Buy on mid-caps (Orient Paper, India Cements, and JK Cement) under our coverage due to attractive valuations.

Thanks & Regards, 

--