15 April 2015

Cement- 1QCY15: Earnings preview Weak earnings in a seasonally strong quarter :: Nomura research

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Weak volumes to weigh on earnings; accumulate UTCEM and SRCM on potential weakness Overall, we expect cement companies to report flat revenue and operating profit y-y for 1QCY15F, owing to negative growth in cement volumes during the quarter. We expect 1QCY15F cement volumes to decline by ~5% y-y – the weakest in any quarter in the past couple of years. However, going into FY16F, we expect cement demand to recover on the government’s higher spending on infrastructure projects (increased allocation for roads and railways in the Union Budget FY16), and we estimate cement volume growth at ~7.8% for FY16F. We remain selective on the sector given the wide disparity in utilisation levels across regions, along with demand drivers being more favourable for some regions. Our preferred sector picks are UltraTech Cement (UTCEM IN, Buy) and Shree Cement (SRCM IN, Buy). Separately, in our Neutral calls, we prefer Ambuja (ACEM IN) over ACC (ACC IN). We have a Reduce on India Cements (ICEM IN). Revenue and operating profit to be flat y-y; operating profit to decline for those with higher north exposure owing to weak pricing Overall, we expect cement companies’ topline to be flat y-y, owing to negative growth in volumes. The benefit of a decline in international coal and diesel prices should be offset by lower operating leverage. As a result, we expect operating profit to be largely flat y-y. With weak pricing in the north, players with higher north exposure such as Shree Cement and Ambuja Cement will likely report a decline in operating profit (-8% y-y and -26% y-y respectively). In contrast, those with a higher south exposure should witness a sharp increase in operating profit led by higher cement prices on the back of continued production discipline among the south players. On the other hand, pan-India players such as UTCEM and ACC will likely report nearly flattish EBITDA y-y. 1Q volumes to decline ~5% y-y, albeit much higher for south players In our earlier report ‘Channel Checks’, we highlighted that a weak demand scenario persisted across India in 1Q. One of the key reasons for the weak demand was lower cement offtake from government-related projects (cut back in government spending to meet its fiscal deficit target for FY15). For the companies under our coverage, we expect cement volumes to decline ~5% y-y in 1QCY15F, which should be one of the weakest in any quarter over the past couple of years. Except Shree Cement, we expect all the companies we cover to report negative volume growth. And we expect the negative volume growth to be more profound for the south-based players, as we estimate India Cements’ volumes to decline by ~20% y-y. All-India cement prices up 3.0% q-q, 6%y-y on higher prices in south The price hikes in January were pulled back in late-Feb and early-March owing to tepid demand across regions, except the south where prices remained firm during the quarter despite weak demand. Region-wise, in 1Q the changes in cement prices in the North were -6% y-y, -1% q-q; Centre +1%y-y, -1%q-q; East +1%y-y, +2%q-q; West +5%y-y, +4%q-q, and; South +29%y-y, +10%q-q.

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