Weakness persists, near term triggers lacking
Cement companies under our coverage are expected to post weak numbers
in Q3FY14E led by decline in volume and weak realization. Led by
volume and realization decline, average operating margin of our
coverage price is expected to contract on a YoY basis, though on a
sequential basis, there could be some improvement led by lower repair
& maintenance costs. Cement realization is facing continuous pressure
due to lower demand which will keep OPMs of cement companies under
pressure in the near term. Our interactions with cement dealers
suggest that cement prices continue to remain volatile and there have
been price declines recently. We believe the pressure on realization
with no-near term triggers for volume recovery will suppress stock
prices for the next 2-3 quarters and hence, maintain our cautious
stance on the sector. We have also downgraded our rating on Kajaria
Ceramics to Hold (earlier: Buy) considering the steep 24% increase in
the stock price in the past month.
$ Sluggish volume growth: Aggregate sales volume of our coverage
universe is expected to decline 3% YoY due to subdued demand. In our
coverage universe, volume is set to decline 4-8% YoY for large cement
players. Shree Cement is expected to post a volume growth of 11.5% YoY
in the quarter.
$ Realization to remain under pressure: Average realization for our
coverage universe is expected to decline 4.8% YoY in the quarter
primarily due to sharp fall in realization of Ambuja Cements, Shree
Cement and JK Cement. Realization of Ambuja and Shree cement is
expected to remain under pressure due to higher non-trade sales.
UltraTech Cement is expected to post realization growth of 2% YoY
during the quarter.
$ Pressure on cement price and sales volume leads to downward revision
in earnings estimates: Lower-than-expected improvement in cement price
(average 1.6% QoQ vs. est. 4% earlier) and delayed recovery in cement
consumption growth forces us to cut EBITDA estimates sharply for our
coverage universe. We expect Bloomberg consensus estimate to be
revised downwards sharply post the result season. We have revised
EBITDA estimates for coverage universe downwards by 9-18% for FY14E
and 6-14% for FY15E.
$ Recommendation and key risks: We maintain a cautious stance on the
cement sector for the next 2-3 quarters as cement price is under
continued pressure due to lower demand. Our interaction with industry
participants suggest that cement demand will only improve post general
elections. We are also concerned over the sharp deterioration in
earnings quality of cement companies under our coverage. Key upside
risks to our thesis could be a) sharp recovery in cement consumption,
b) higher-than-estimated cement price and c) lower energy costs.
Thanks & Regards
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Cement companies under our coverage are expected to post weak numbers
in Q3FY14E led by decline in volume and weak realization. Led by
volume and realization decline, average operating margin of our
coverage price is expected to contract on a YoY basis, though on a
sequential basis, there could be some improvement led by lower repair
& maintenance costs. Cement realization is facing continuous pressure
due to lower demand which will keep OPMs of cement companies under
pressure in the near term. Our interactions with cement dealers
suggest that cement prices continue to remain volatile and there have
been price declines recently. We believe the pressure on realization
with no-near term triggers for volume recovery will suppress stock
prices for the next 2-3 quarters and hence, maintain our cautious
stance on the sector. We have also downgraded our rating on Kajaria
Ceramics to Hold (earlier: Buy) considering the steep 24% increase in
the stock price in the past month.
$ Sluggish volume growth: Aggregate sales volume of our coverage
universe is expected to decline 3% YoY due to subdued demand. In our
coverage universe, volume is set to decline 4-8% YoY for large cement
players. Shree Cement is expected to post a volume growth of 11.5% YoY
in the quarter.
$ Realization to remain under pressure: Average realization for our
coverage universe is expected to decline 4.8% YoY in the quarter
primarily due to sharp fall in realization of Ambuja Cements, Shree
Cement and JK Cement. Realization of Ambuja and Shree cement is
expected to remain under pressure due to higher non-trade sales.
UltraTech Cement is expected to post realization growth of 2% YoY
during the quarter.
$ Pressure on cement price and sales volume leads to downward revision
in earnings estimates: Lower-than-expected improvement in cement price
(average 1.6% QoQ vs. est. 4% earlier) and delayed recovery in cement
consumption growth forces us to cut EBITDA estimates sharply for our
coverage universe. We expect Bloomberg consensus estimate to be
revised downwards sharply post the result season. We have revised
EBITDA estimates for coverage universe downwards by 9-18% for FY14E
and 6-14% for FY15E.
$ Recommendation and key risks: We maintain a cautious stance on the
cement sector for the next 2-3 quarters as cement price is under
continued pressure due to lower demand. Our interaction with industry
participants suggest that cement demand will only improve post general
elections. We are also concerned over the sharp deterioration in
earnings quality of cement companies under our coverage. Key upside
risks to our thesis could be a) sharp recovery in cement consumption,
b) higher-than-estimated cement price and c) lower energy costs.
Thanks & Regards
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