Building Materials - Sector Update - Cement upturn to continue, paints fully valued :: Centrum

Cement upturn to continue, paints fully valued



We expect cement sector to continue the growth trajectory led by the
government’s thrust on infrastructure development. The slowing pace of
capacity addition will also lead to improvement in effective
utilization rate of the industry offering improved pricing power to
manufactures. In the Cement space, our top pick continues to be
UltraTech Cement followed by Grasim Industries and ACC. We believe
other building materials (tiles and paints) will continue their growth
momentum in tandem with improvement in economic activities. However,
post recent run-up in the stocks in the Paints sector, we believe
further room for upside is limited and downgrade rating to Hold on
Asian Paints and Berger Paints.

$ Cement sector to benefit from infrastructure push and improvement in
utilization rate: We expect cement demand to improve going forward led
by our belief that there would be better policy actions in the
infrastructure space including faster clearances of new projects and
quick re-start of stalled projects. We expect the pace of capacity
addition to slow down post FY15E leading to improvement in utilization
rate for the sector. Post the decline in industry utilization rate to
72.9% in FY15E against 73.4% in FY14; we expect gradual improvement to
75%/78.9% in FY16E/FY17E. With improvement in economic activities and
better GDP growth, we expect growth momentum to continue for Paints
and Tiles industry.

$ Higher opex to lead to contraction in margins for cement companies;
Paints and Tiles to post better numbers in Q1FY15E: Cement prices
remained firm during Q1FY15E (~2.4% QoQ increase) which would result
in sequential improvement in realization for our coverage universe.
Sales volume is expected to increase 8.4% YoY led by 20.1%/10.4%/16%
YoY increase in sales volume of Shree Cement/UltraTech/JK Cement.
However, we expect average operating margin to contract by 119bps YoY
to 18.4% in Q1FY15E led by increase in operating costs (raw materials
and freight). We expect better numbers from Paints and Tile companies
led by higher volume and prices.

$ Budget expectations for the sector:  We do not expect major
announcements in the Union Budget for the sector though the cement
industry is seeking lower excise duty. We expect the status quo to be
maintained on excise duty. However, the building materials sector will
be an indirect beneficiary of infrastructure development (100 new
smart cities, development of freight corridors and national highways).

$ Outlook & top picks: We remain largely positive on the sector as we
believe earnings will improve going forward led by better demand from
the government’s thrust on infrastructure development. However, sharp
run-up in stock prices of Paints and Tiles sector leaves little room
for further upside and we downgrade our rating to Hold on Asian Paints
and Berger Paints. In the cement space, our top pick continues to be
UltraTech followed by Grasim and ACC. In the mid-caps space, we like
JK Cement. We retain Hold on Shree Cement due to expensive valuations
and Sell on India Cements due to lack of upside triggers.



Thanks & Regards

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