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It’s Different This Time
Cement volume growth is more correlated to gross fixed capital
formation (GFCF) growth than GDP growth. Rising risks to near-term
low GFCF growth (est. 5.5% for FY12 v/s 8.6% for FY11) will lower
cement volume growth to ~3.5% in FY12 after a decadal low of ~5% in
FY11. Higher rolling 3-year capacity additions vis-à-vis demand will
keep capacity utilisations, realisations and operating margins under
pressure. We expect valuations, which are 20%-40% ahead of
historical 5-year averages, to continue falling with declining RoICs and
hence initiate with a negative view on the sector.
Rising raw material costs and declining cement prices are now well known
features of the cement landscape. However, industry participants expect a
revival in cement volume growth, as early as 2HFY12. This, they hope, can
drive capacity utilisation, pricing and EBITDA/tonne. We believe meaningful
volume and pricing growth recovery is at least 12-18 months away and more
attractive entry points will emerge over this period. We advise SELL on the
large cap cement stocks.
Decelerating GFCF growth to lead to a double dip in volume growth
Contrary to the consensus view, we find that cement volume growth has
significantly higher correlation with GFCF growth rather than with GDP
growth. Our economist, Ritika Mankar, expects GFCF growth to decelerate to
~5.5% in FY2012 from 8.6% in FY2011. We expect this deceleration in GFCF
to lead to a drop in cement volume growth in FY2012 to ~3.5% (~5% in
FY2011). Ritika further highlights that her GFCF growth (and hence our
cement volume growth) assumptions may be at risk, as history suggests that
global economic crises tend to adversely impact investment demand in India.
Pricing will fail to recover materially over FY11-FY13
Whilst annual capacity additions may slow down over FY11-FY13, rolling 3-
year capacity CAGR will remain ahead of rolling 3-year demand CAGR to
FY13. This will keep utilization low and pricing under check. We estimate 73%
industry capacity utilisation for FY12, rising to 75% in FY14. We expect a
marginal upturn in pricing (4%-5% p.a.) as 3-year rolling demand and
capacity CAGR converge over FY13-FY14. In FY03, despite 82% capacity
utilisation, prices declined as 3-year capacity CAGR remained ahead of
demand. Low utilisation and rising costs will lead to declining EBITDA/ tonne.
Valuations/ stocks should follow declining RoICs/ RoCEs
Whilst the cement majors have posted improved EBITDA/tonne for Apr-June
2011 quarter, we expect EBITDA/tonne to decline (by Rs100-Rs200/tonne) for
the cement majors for CY2011/FY2012. We expect RoICs to decline, with any
material improvement in RoIC at least 2 years away. Presently, the cement
companies are trading at a significant premium (20-30%) to their historical
EV/EBITDA in spite of their relatively lower profitability ratios compared to
their historical averages.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
It’s Different This Time
Cement volume growth is more correlated to gross fixed capital
formation (GFCF) growth than GDP growth. Rising risks to near-term
low GFCF growth (est. 5.5% for FY12 v/s 8.6% for FY11) will lower
cement volume growth to ~3.5% in FY12 after a decadal low of ~5% in
FY11. Higher rolling 3-year capacity additions vis-à-vis demand will
keep capacity utilisations, realisations and operating margins under
pressure. We expect valuations, which are 20%-40% ahead of
historical 5-year averages, to continue falling with declining RoICs and
hence initiate with a negative view on the sector.
Rising raw material costs and declining cement prices are now well known
features of the cement landscape. However, industry participants expect a
revival in cement volume growth, as early as 2HFY12. This, they hope, can
drive capacity utilisation, pricing and EBITDA/tonne. We believe meaningful
volume and pricing growth recovery is at least 12-18 months away and more
attractive entry points will emerge over this period. We advise SELL on the
large cap cement stocks.
Decelerating GFCF growth to lead to a double dip in volume growth
Contrary to the consensus view, we find that cement volume growth has
significantly higher correlation with GFCF growth rather than with GDP
growth. Our economist, Ritika Mankar, expects GFCF growth to decelerate to
~5.5% in FY2012 from 8.6% in FY2011. We expect this deceleration in GFCF
to lead to a drop in cement volume growth in FY2012 to ~3.5% (~5% in
FY2011). Ritika further highlights that her GFCF growth (and hence our
cement volume growth) assumptions may be at risk, as history suggests that
global economic crises tend to adversely impact investment demand in India.
Pricing will fail to recover materially over FY11-FY13
Whilst annual capacity additions may slow down over FY11-FY13, rolling 3-
year capacity CAGR will remain ahead of rolling 3-year demand CAGR to
FY13. This will keep utilization low and pricing under check. We estimate 73%
industry capacity utilisation for FY12, rising to 75% in FY14. We expect a
marginal upturn in pricing (4%-5% p.a.) as 3-year rolling demand and
capacity CAGR converge over FY13-FY14. In FY03, despite 82% capacity
utilisation, prices declined as 3-year capacity CAGR remained ahead of
demand. Low utilisation and rising costs will lead to declining EBITDA/ tonne.
Valuations/ stocks should follow declining RoICs/ RoCEs
Whilst the cement majors have posted improved EBITDA/tonne for Apr-June
2011 quarter, we expect EBITDA/tonne to decline (by Rs100-Rs200/tonne) for
the cement majors for CY2011/FY2012. We expect RoICs to decline, with any
material improvement in RoIC at least 2 years away. Presently, the cement
companies are trading at a significant premium (20-30%) to their historical
EV/EBITDA in spite of their relatively lower profitability ratios compared to
their historical averages.
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