Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Is cement defensive?
Cement majors have outperformed the Sensex by ~15ppt ytd despite weak
demand-supply balance. The apparent anomaly may be explained by (a) acute
investor focus on balance sheet, cash flow measures, and (b) regional
diversification of the large caps which de-risks their earnings; indeed cement
mid- and small-caps have underperformed the market consistently. With a
12m view, we retain our cautious sector stance and see limited absolute
upside from current levels given the soft demand-supply outlook but highlight
that the majors may continue to outperform the market near term.
Has the entire cement sector really outperformed?
q The Indian cement majors (ACC, Ambuja, UltraTech) are down just 1-8% ytd
cf. the 19% ytd decline for Sensex.
q This may appear surprising given the weak demand scenario in the last few
months and hefty capacity surpluses; sector earnings have also been volatile.
q The impact of the overall cyclical weakness in the sector has been more
apparent in the stock performance of mid- and small-caps, though.
q For example, cement mid- and small-caps have underperformed by 13ppt in
the last 12-months; even on a ytd basis, these have underperformed by 3ppt.
Frontline stocks are indeed far less risky…
q Our analysis for the last nine quarters indicate that the profitability of pan
India players have been relatively lesser volatile cf. the smaller companies…
q … where the impact of regional demand-supply becomes more pronounced.
q For example, average Ebitda margins for smaller companies varied in a huge
range of Rs250-1300/t cf. a smaller Rs500-1300/t range for the larger ones.
q Further, while profitability for all companies is broadly similar during an upcycle, the smaller ones lose disproportionately during a downturn.
… and have gained from the markets focus on balance sheet quality
q The de-risking from a pan-India spread aside, the larger stocks have also
gained from the acute investor focus on balance sheet, cash flow measures.
q For example, ACC and Ambuja are both +US$500m net cash while UltraTech
has a comfortable net gearing of <0.2x (US$400m net debt).
q In this context, it is useful to note that 10 out of 15 best performing stocks in
the CLSA India Coverage Universe are net cash companies.
Large caps may remain relative performers…
q Despite the weak demand-supply outlook, therefore, the cement large caps
may continue to outperform the market in the current volatile phase.
q We prefer UltraTech over ACC and Ambuja near term given its superior
earnings growth.
q We note the global weakness in 2008-09 did not impact the sector as cement
majors continued to report a stable quarterly Ebitda of Rs900-1,100/t.
q In the event of a similar crisis, we expect similar trend and would not expect
any further worsening in cement demand-supply-pricing (we already build in
margin pressure due to supply issues in the sector, though).
… but see limited absolute upside from a 12 month view
q On a 12-month view, though, we see limited absolute upsides from current
levels given continued weakness in cement demand, rising capacity surpluses.
q Operating rates, for example, would continue to remain under pressure
keeping prices under check and impact sector profitability.
q We maintain our negative recs. on ACC (SELL), Ambuja (SELL), UltraTech (UPF), Shree (U-PF) with a 12 month view. We rate both India, Grasim as O-PF.
q Key risk to our negative view: a revival in demand growth near term (for
example, July despatches were up 10%YoY) and stronger than expected
producer pricing discipline (prices in South have surged past all-India
averages, for example, despite the weakest demand-supply balance).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Is cement defensive?
Cement majors have outperformed the Sensex by ~15ppt ytd despite weak
demand-supply balance. The apparent anomaly may be explained by (a) acute
investor focus on balance sheet, cash flow measures, and (b) regional
diversification of the large caps which de-risks their earnings; indeed cement
mid- and small-caps have underperformed the market consistently. With a
12m view, we retain our cautious sector stance and see limited absolute
upside from current levels given the soft demand-supply outlook but highlight
that the majors may continue to outperform the market near term.
Has the entire cement sector really outperformed?
q The Indian cement majors (ACC, Ambuja, UltraTech) are down just 1-8% ytd
cf. the 19% ytd decline for Sensex.
q This may appear surprising given the weak demand scenario in the last few
months and hefty capacity surpluses; sector earnings have also been volatile.
q The impact of the overall cyclical weakness in the sector has been more
apparent in the stock performance of mid- and small-caps, though.
q For example, cement mid- and small-caps have underperformed by 13ppt in
the last 12-months; even on a ytd basis, these have underperformed by 3ppt.
Frontline stocks are indeed far less risky…
q Our analysis for the last nine quarters indicate that the profitability of pan
India players have been relatively lesser volatile cf. the smaller companies…
q … where the impact of regional demand-supply becomes more pronounced.
q For example, average Ebitda margins for smaller companies varied in a huge
range of Rs250-1300/t cf. a smaller Rs500-1300/t range for the larger ones.
q Further, while profitability for all companies is broadly similar during an upcycle, the smaller ones lose disproportionately during a downturn.
… and have gained from the markets focus on balance sheet quality
q The de-risking from a pan-India spread aside, the larger stocks have also
gained from the acute investor focus on balance sheet, cash flow measures.
q For example, ACC and Ambuja are both +US$500m net cash while UltraTech
has a comfortable net gearing of <0.2x (US$400m net debt).
q In this context, it is useful to note that 10 out of 15 best performing stocks in
the CLSA India Coverage Universe are net cash companies.
Large caps may remain relative performers…
q Despite the weak demand-supply outlook, therefore, the cement large caps
may continue to outperform the market in the current volatile phase.
q We prefer UltraTech over ACC and Ambuja near term given its superior
earnings growth.
q We note the global weakness in 2008-09 did not impact the sector as cement
majors continued to report a stable quarterly Ebitda of Rs900-1,100/t.
q In the event of a similar crisis, we expect similar trend and would not expect
any further worsening in cement demand-supply-pricing (we already build in
margin pressure due to supply issues in the sector, though).
… but see limited absolute upside from a 12 month view
q On a 12-month view, though, we see limited absolute upsides from current
levels given continued weakness in cement demand, rising capacity surpluses.
q Operating rates, for example, would continue to remain under pressure
keeping prices under check and impact sector profitability.
q We maintain our negative recs. on ACC (SELL), Ambuja (SELL), UltraTech (UPF), Shree (U-PF) with a 12 month view. We rate both India, Grasim as O-PF.
q Key risk to our negative view: a revival in demand growth near term (for
example, July despatches were up 10%YoY) and stronger than expected
producer pricing discipline (prices in South have surged past all-India
averages, for example, despite the weakest demand-supply balance).
No comments:
Post a Comment