Q1FY13 Results Preview
Cement
Sequential contraction in margins despite higher prices
We expect aggregate sales volumes of our coverage universe to grow 5.6% YoY to 29.5mt driven by improved demand in the East and West regions in the quarter. Average cement realization is expected to improve 7.1% YoY (and 2.6% QoQ) to Rs4,112/tonne led by sharp improvement in cement price in the Central and East regions. Though volume and realization are expected to increase, rising costs would lead to 1.6pp contraction in average EBITDA margin of our coverage universe. Industry despatches during the quarter is expected to increase 8.4% YoY to 58.3mt. Though 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 sales volume and realization will be under pressure in the monsoon season and expect weakness in cement prices as seen in last two years. We remain concerned on the higher valuation of the top 3 players (ACC, Ambuja and Ultra Tech) which are trading in the range of 10-11x FY13E EV/EBITDA compared to their historical average of 7-8x and maintain Sell rating on these stocks.
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m Mid-size players to lead volume growth of our coverage universe: Aggregate sales volume of our coverage universe is expected to grow 5.6% YoY led by 12-15% YoY volume growth for Shree Cement, JK Cement and Orient Paper. Among large cement players Ambuja Cements is expected to register volume growth of 5.7% YoY benefitting from its capacity expansion last year.
m Prices continue to rise despite sequential decline in sales volume: Realization of companies under our coverage is expected to increase 2-3% QoQ despite steep decline in sequential sales volume. We expect 8.1% QoQ volume de-growth for the industry during the quarter. Cement prices increased 3-4% in June ’12 across India after a fall of ~2% in May ’12.
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 is expected to contract 1.6pp YoY to 22.4%. Freight cost is expected to increase due to 23% increase in base freight by Indian Railways in March and domestic coal price is expected to remain higher due to price hikes last year. Among large cement players, Ultra Tech is expected to report the highest margin decline of 4.8pp YoY largely due to higher raw material cost, energy cost and freight costs (Rs980/tonne against Rs779/tonne in Q1FY12). Among mid-caps, we expect 3.1pp margin improvement for JK Cement driven by volume increase and lower fuel costs led by decline in pet coke price.
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 realizations and decline in return ratios. We maintain Sell on ACC, Ambuja and UltraTech. We have a Neutral rating on Grasim Industries. We have also downgraded Shree Cement and JK Cement to Neutral from Buy post recent outperformance and appreciation in stock price. We maintain Buy on Orient Paper and India Cements due to attractive valuations.
m Prices continue to rise despite sequential decline in sales volume: Realization of companies under our coverage is expected to increase 2-3% QoQ despite steep decline in sequential sales volume. We expect 8.1% QoQ volume de-growth for the industry during the quarter. Cement prices increased 3-4% in June ’12 across India after a fall of ~2% in May ’12.
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 is expected to contract 1.6pp YoY to 22.4%. Freight cost is expected to increase due to 23% increase in base freight by Indian Railways in March and domestic coal price is expected to remain higher due to price hikes last year. Among large cement players, Ultra Tech is expected to report the highest margin decline of 4.8pp YoY largely due to higher raw material cost, energy cost and freight costs (Rs980/tonne against Rs779/tonne in Q1FY12). Among mid-caps, we expect 3.1pp margin improvement for JK Cement driven by volume increase and lower fuel costs led by decline in pet coke price.
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 realizations and decline in return ratios. We maintain Sell on ACC, Ambuja and UltraTech. We have a Neutral rating on Grasim Industries. We have also downgraded Shree Cement and JK Cement to Neutral from Buy post recent outperformance and appreciation in stock price. We maintain Buy on Orient Paper and India Cements due to attractive valuations.
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