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http://www.kotaksecurities.com/pdf/dmb/MorningInsight10042012.pdf
CEMENT
Cement demand has started witnessing improvement on account of
improvement in the construction activity from infrastructure as well as
individual housing segment. Cement prices remained firm during Q4FY12
and recovered back the declines seen in the prices in Dec, 2011-Jan, 2012
period. Along with this, due to cost pressures related to hike in railway
freight rates and excise duty, prices inched up further in the month of
March. Overall costs continued to remain high.
Thus, on a sequential basis, cement realizations for companies are likely to
improve during Q4FY12. We expect revenues in our coverage universe to
grow by 12% on QoQ basis and 13% on YoY basis. Operating margins are
expected to improve sequentially but are likely to be lower on yearly basis
due to higher costs. Net profit during Q4FY12 is expected to decline by 7%
QoQ and 15% YoY led by higher operational costs as well as higher
depreciation charges.
Since we have now begin to see demand growth revival, we would
recommend a selective approach to cement sector and would prefer players
having attractive valuations and higher capacities since delta effect of
higher cement prices will be much more with these players.
Demand growth during Q4FY12
Cement demand growth since Nov, 2011 has grown in double digits on a monthly
basis and demand growth for Apr, 11 - Feb, 12 period now stands at 6.9%. We
expect full year demand to grow by nearly 6% during FY12 led by revival in construction activity. We also expect revival in infrastructure award process during FY13
which would also result in keeping cement demand growth strong. We thus expect
cement demand to improve by 9.5-10% going forward. Focus on infrastructure creation as well as pre-election spend during FY13 and FY14 would be key drivers for
the cement demand growth going forward.
Cost pressures continue to remain high
Companies may continue to witness cost pressures led by higher freight costs as well
as raw material costs. Imported coal prices have come down during the quarter and
thus companies having higher imported coal component such as India Cements may
benefit during the quarter. Government has also reduced import duty on coal in
Union budget but impact of lower duties would be reflected fully only from Q1FY13
onwards. However, power and fuel cost may jump up during FY13 for companies
having higher domestic sourcing such as ACC due to expected increase in coal
prices by Coal India.
Since companies have passed on most of the cost increases, we don't expect
EBITDA margins to come down on a sequential basis. However, on yearly basis,
margins are likely to be lower due to higher costs.
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