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India Equity Research Reports, IPO and Stock News
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Concrete Trends
Prices rocket; more downside
than upside from here
Visit to small south-based units aggravates caution levels
We recently met with small, listed companies in south India that are trading at
EV/capacity of60% discount to replacement cost) to understand
their business outlook. From the standpoint of investors in large cement
companies, we advise caution on two fronts: 1) strong cement price increases
over last 3 months seem unlikely to sustain beyond the ongoing peak demand
season (Jan-Jun ’11) and 2) the industry is still in expansion mode rather than
consolidation. We rate UltraTech as our top Underperform idea; Grasim is our
preferred pick.
Cement prices in most regions close to historical highs
Cement prices in most regions (incl. south) are close to historical highs. Prices are
up 21% vs FY08 levels when the industry’s capacity utilization peaked at ~97%.
Industry utiln. is currently ~76%, post 52% capacity increase over FY08-11.
Rational pricing held together by intensive efforts
Our industry discussions point towards rational production and intensive top
management review of supply dynamics as key factors behind the price
increases. In south, for example, existing units are likely undertaking about 30%
production cut while new units are undertaking about 40% production cut.
Downside risks: uneven growth; more expansions; CCI
Over last 3 years, capacity growth of top 10 players in the industry has been
uneven ranging from 27% to 300%; thus, rational production (capacity cut)
impacts each player differently and in a way penalizes producers with prudent
capital allocation. Also, upcoming fresh expansions esp. in south-west India
(~11mn tpa) from market participants like ACC, JPA, Jay Jyothi, KCP etc could
test industry’s rationality. Upside to cement prices may also be capped owing to
scrutiny by the Competition Commission of India (CCI) that recently asked players
for an update.
Risk of structural de-rating despite ST earnings uplift
Our discussions indicate that most companies are still planning organic
expansions led by the experience of bigger profits in ‘07-08 relative to total profits
in the prior decade. We think continuing expansions create risk of structural sector
de-rating. Short-term, however, we could see uplift to FY12E earnings led by
strong 1Q FY12E as recent price increases far outweigh any cost-push.
Demand recovery – hope prevails; visibility remains poor
Our meetings indicate strong hope of revival in cement demand but low visibility
on demand drivers. Barring a fiscal year-end push to government spending, most
industry participants pointed to political instability as a key drag on demand.
Price objective basis & risk
Ambuja Cements (AMBUF)
We have a price objective of Rs85/sh for Ambuja. We value the company at
CY11E EV/capacity of around US$95/ton based on a 20-25% discount to the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount in current cycle. The 20-25% discount is in line with the average (rather
than trough) discount witnessed through the previous downturn (1997-2002).
Downside risk to our PO stems from unforeseen rise in energy prices. Upside
possibilities would stem from rational pricing by producers and unforeseen easing
in energy prices, especially coal.
Assoc. Cement (ADCLF)
We have a price objective of Rs800/sh for ACC. We value the company at a
CY11E EV/capacity of around US$95/ton based on a 20-25% discount versus the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount levels in the current cycle. The 20-25% discount is in line with the
average (rather than trough) discount witnessed through the previous downturn
(1997-2002). Downside risk to our PO stems from continued rise in energy prices.
Upside possibilities stem from rational pricing by producers and unforeseen
easing in energy prices especially coal.
Grasim (GRSJF / GRSJY)
We have a price objective of Rs2510 (GDR of US$54.92) for Grasim. We value
the company's dominant cement business at a 20% discount to the industry's
current replacement cost of US$120-125/ton. The 20% discount is in line with the
average (rather than trough) discount witnessed through the previous downturn
(1997-2002). The VSF business is pegged at an FY12E PE of about 7.5x,
implying a sharp discount vs. the local market (BSE 30). A sharp slowdown in
VSF demand and an unforeseen rise in energy prices for the cement business
present downside risks to our PO. Upside risk could stem from strong and
sustained rational pricing behaviour of cement producers across the industry and
an unforeseen further rise in cotton and PSF prices.
India Cements (INIAF / IAMUY)
We have a price objective of Rs100/sh (GDR of US$2.2) for India Cements. We
value the company's cement business at an FY12E EV/capacity of around
US$70-75/ton based on nearly 40% discount to the industry's replacement cost of
US$120-125/ton. Our PO places the stock in line with the trough valuation of
industry majors during the previous down-cycle and values the Co's IPL franchise
at book. Owing to visible downturn in earnings, India Cements' valuations seem
rich relative to peers on both PE and EV/EBITDA. Further downside to our PO
could stem from a longer-than-anticipated downcycle, and unforeseen rise in
energy prices. Upside possibilities would stem from rational producer behavior
across the industry, unexpected delays in stabilisation of new capacities, and
unforeseen easing in energy prices, especially coal.
Shree Cements (SREEF)
We have a price objective of Rs1825 for Shree. We value the core cement
business at FY12E EV/capacity of around US$95/ton based on a 20-25%
discount to the industry's current replacement cost of US$120-125/ton. The power
business is valued at nearly 7x FY12-EV/EBITDA based on a 20% discount to
local market multiples. Upside possibilities would stem from rational producer
behaviour across the industry, stronger-than-expected demand in north India and
unforeseen easing in energy prices especially pet coke. Downside risk would
stem from slow cement demand in north India, low demand for merchant power
and unexpected further rise in pet coke prices.
UltraTech Cemen (XDJNF)
We have a price objective of Rs750/sh for UltraTech. We value the company at
an EV/capacity of around US$95-$100/ton, based on a 20-25% discount to the
industry's replacement cost of US$125/ton. The trough discount vs. replacement
cost was steeper, at 40-45%, in the previous cycle, but improved RoEs and a
significantly healthier balance sheet may warrant a lower discount in the current
cycle. A 20-25% discount is in line with the average (rather than trough) discount
witnessed through the previous downturn (1997-2002). An unforeseen rise in
energy prices would be an added negative for our outlook. Upside risk to our
outlook would stem from strong and sustained rational pricing behaviour from
cement producers across the industry. A sharp easing in energy prices would
also present upside to our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Concrete Trends
Prices rocket; more downside
than upside from here
Visit to small south-based units aggravates caution levels
We recently met with small, listed companies in south India that are trading at
EV/capacity of
their business outlook. From the standpoint of investors in large cement
companies, we advise caution on two fronts: 1) strong cement price increases
over last 3 months seem unlikely to sustain beyond the ongoing peak demand
season (Jan-Jun ’11) and 2) the industry is still in expansion mode rather than
consolidation. We rate UltraTech as our top Underperform idea; Grasim is our
preferred pick.
Cement prices in most regions close to historical highs
Cement prices in most regions (incl. south) are close to historical highs. Prices are
up 21% vs FY08 levels when the industry’s capacity utilization peaked at ~97%.
Industry utiln. is currently ~76%, post 52% capacity increase over FY08-11.
Rational pricing held together by intensive efforts
Our industry discussions point towards rational production and intensive top
management review of supply dynamics as key factors behind the price
increases. In south, for example, existing units are likely undertaking about 30%
production cut while new units are undertaking about 40% production cut.
Downside risks: uneven growth; more expansions; CCI
Over last 3 years, capacity growth of top 10 players in the industry has been
uneven ranging from 27% to 300%; thus, rational production (capacity cut)
impacts each player differently and in a way penalizes producers with prudent
capital allocation. Also, upcoming fresh expansions esp. in south-west India
(~11mn tpa) from market participants like ACC, JPA, Jay Jyothi, KCP etc could
test industry’s rationality. Upside to cement prices may also be capped owing to
scrutiny by the Competition Commission of India (CCI) that recently asked players
for an update.
Risk of structural de-rating despite ST earnings uplift
Our discussions indicate that most companies are still planning organic
expansions led by the experience of bigger profits in ‘07-08 relative to total profits
in the prior decade. We think continuing expansions create risk of structural sector
de-rating. Short-term, however, we could see uplift to FY12E earnings led by
strong 1Q FY12E as recent price increases far outweigh any cost-push.
Demand recovery – hope prevails; visibility remains poor
Our meetings indicate strong hope of revival in cement demand but low visibility
on demand drivers. Barring a fiscal year-end push to government spending, most
industry participants pointed to political instability as a key drag on demand.
Price objective basis & risk
Ambuja Cements (AMBUF)
We have a price objective of Rs85/sh for Ambuja. We value the company at
CY11E EV/capacity of around US$95/ton based on a 20-25% discount to the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount in current cycle. The 20-25% discount is in line with the average (rather
than trough) discount witnessed through the previous downturn (1997-2002).
Downside risk to our PO stems from unforeseen rise in energy prices. Upside
possibilities would stem from rational pricing by producers and unforeseen easing
in energy prices, especially coal.
Assoc. Cement (ADCLF)
We have a price objective of Rs800/sh for ACC. We value the company at a
CY11E EV/capacity of around US$95/ton based on a 20-25% discount versus the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount levels in the current cycle. The 20-25% discount is in line with the
average (rather than trough) discount witnessed through the previous downturn
(1997-2002). Downside risk to our PO stems from continued rise in energy prices.
Upside possibilities stem from rational pricing by producers and unforeseen
easing in energy prices especially coal.
Grasim (GRSJF / GRSJY)
We have a price objective of Rs2510 (GDR of US$54.92) for Grasim. We value
the company's dominant cement business at a 20% discount to the industry's
current replacement cost of US$120-125/ton. The 20% discount is in line with the
average (rather than trough) discount witnessed through the previous downturn
(1997-2002). The VSF business is pegged at an FY12E PE of about 7.5x,
implying a sharp discount vs. the local market (BSE 30). A sharp slowdown in
VSF demand and an unforeseen rise in energy prices for the cement business
present downside risks to our PO. Upside risk could stem from strong and
sustained rational pricing behaviour of cement producers across the industry and
an unforeseen further rise in cotton and PSF prices.
India Cements (INIAF / IAMUY)
We have a price objective of Rs100/sh (GDR of US$2.2) for India Cements. We
value the company's cement business at an FY12E EV/capacity of around
US$70-75/ton based on nearly 40% discount to the industry's replacement cost of
US$120-125/ton. Our PO places the stock in line with the trough valuation of
industry majors during the previous down-cycle and values the Co's IPL franchise
at book. Owing to visible downturn in earnings, India Cements' valuations seem
rich relative to peers on both PE and EV/EBITDA. Further downside to our PO
could stem from a longer-than-anticipated downcycle, and unforeseen rise in
energy prices. Upside possibilities would stem from rational producer behavior
across the industry, unexpected delays in stabilisation of new capacities, and
unforeseen easing in energy prices, especially coal.
Shree Cements (SREEF)
We have a price objective of Rs1825 for Shree. We value the core cement
business at FY12E EV/capacity of around US$95/ton based on a 20-25%
discount to the industry's current replacement cost of US$120-125/ton. The power
business is valued at nearly 7x FY12-EV/EBITDA based on a 20% discount to
local market multiples. Upside possibilities would stem from rational producer
behaviour across the industry, stronger-than-expected demand in north India and
unforeseen easing in energy prices especially pet coke. Downside risk would
stem from slow cement demand in north India, low demand for merchant power
and unexpected further rise in pet coke prices.
UltraTech Cemen (XDJNF)
We have a price objective of Rs750/sh for UltraTech. We value the company at
an EV/capacity of around US$95-$100/ton, based on a 20-25% discount to the
industry's replacement cost of US$125/ton. The trough discount vs. replacement
cost was steeper, at 40-45%, in the previous cycle, but improved RoEs and a
significantly healthier balance sheet may warrant a lower discount in the current
cycle. A 20-25% discount is in line with the average (rather than trough) discount
witnessed through the previous downturn (1997-2002). An unforeseen rise in
energy prices would be an added negative for our outlook. Upside risk to our
outlook would stem from strong and sustained rational pricing behaviour from
cement producers across the industry. A sharp easing in energy prices would
also present upside to our view.
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