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Cement: Key drivers in 2011
Key Drivers
Demand-supply situation: We expect demand to grow at 10% each in FY12 and FY13 on the back of a healthy
~9% GDP growth rate. On the other hand, fresh capacity additions are likely to slow down as major capacities
have already been commissioned and new capacities will take at least 4 years for implementation
Capacity utilization and pricing recovery beyond FY12: Industry utilization to remain low at 80% in FY12,
preventing sharp upward move in cement prices. However, we expect utilization to improve to 85% later on,
resulting in price recovery
Despite rising costs, margin outlook to improve in FY13: Cost pressures due to rising imported coal and freight
costs will put additional pressure on profitability. Thus, we expect industry EBITDA/ton at Rs 700-750 for FY12
against Rs 1,000 during the peak cycle. In FY13, however, we expect EBITDA per ton to rebound to Rs 900-
1,000 level on price recovery
We have increased target FY12 EV/EBITDA multiple to 7x for large cap companies and 6x for others from the
earlier 6.5x and 5.5x respectively. This is to primarily reflect the expected earnings recovery post FY12
HOWEVER, CURRENT VALUATIONS OF MOST LARGE CEMENT STOCKS ALREADY REFLECTS A RECOVERY IN
FY13. Thus we have an Underweight call on the cement sector
Risks
Domestic coal price hike by Coal India
Slippage in demand growth due to slower infra/ construction activities
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