Indian Cement- Majors report y/y growth of 16% driven by deficient rains in July::JPMorgan

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Indian Cement
Majors report y/y growth of 16% driven by deficient
rains in July


 July dispatch growth for pan-India players: YY comparisons in the
rainy months of June-August in our view are not reliable as it can
vary sharply depending on the rainfall in that particular month.
Industry growth as reported by the 4 large players – ACC, ACEM,
UTCEM and JPA (NR), cumulatively stood at 8.28MT, +3% m/m but
up nearly 16% y/y. Inline with the trends seen in the last few months,
the sequential growth reported by the large players remained mixed with
strong numbers reported by ACC (+4.7% m/m) and JPA (+18% m/m),
while ACEM reported flat dispatches m/m and UTCEM reported a
decline of 2.8% m/m in July. ACC in particular has reported y/y growth
sharply ahead of industry YTD with growth rate of 14% v/s YTD CY11
industry growth rate of 6%.
 Benign base and sharply lower rainfall in July helps growth: The y/y
sales growth in July was strong with ACC up 28%, ACEM up 20%, JPA
+19% and UTCEM increasing 7% versus previous year. In our view, the
sharp y/y growth in July is more driven by a benign base of July-10 and
the sharply lower rains in July-11 y/y, which allowed steady state
construction in July. Data on y/y rainfall in July highlights indicates
sharply lower y/y rainfall in July in key cement consuming states such as
Rajasthan, Orissa, Punjab, Gujarat, MP, Maharashtra, AP and Karnataka
and rains were 10-60% y/y lower in the above states which in our view,
has led to sharply higher y/y growth.
 Pricing pressure continues in certain pockets: South India continues to
hold steady with weak demand trends and continued supply discipline.
Our dealer checks indicate that prices continue to remain under pressure,
particularly in North/Central India. Cement prices have declined ~8-15%
over the last month on lower demand and issues in Noida market
diverting surplus to neighbouring regions. Near term pricing trends do
not point to any positive signs given monsoons and festivals in North
India through August impacting demand from existing projects.
 Strong Jun quarter but not as rosy anymore: 1QFY12 earnings so far,
for the cement industry were ahead of expectation with strong realization
offsetting the impact from the 30% price hike implemented by Coal India
in end-Feb. Players with substantial South India exposure (UTCEM,
Orient, Rain, Kesoram, Sagar Cem) reported EBITDA/MT of
Rs1000+/MT as the peak prices in the region despite weak demand
trends. However, EBITDA/MT for the industry is expected to decline
from 2Q onwards given the recent price correction in most market
(except South) and impact from the fuel prices hike in end-June.
Volumes in 2QFY12 could be higher y/y if rains remain low in Aug/Sep.