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Cement
India
2QFY12E: Seasonally weak quarter. We recommend that investors be selective as the
cement sector braces for one of its most abysmal earnings season with (1) modest
volume growth due to a favorable base effect, (2) sequential price decline (Rs15-
20/bag), and (3) the burden of high overhead cost on a low volume base. Cement
stocks have moved up sharply over the recent past, despite the potential regulatory
action from the Competition Commission and a continued demand-supply imbalance
First hints of demand revival, prices weak in monsoon
Our coverage universe will register 7.7% yoy growth in volumes in 2QFY12E primarily driven by
(1) strong volume growth of ACC and Jaiprakash and (2) first signals of a potential demand revival
with industry volumes registering a strong 11% and 8% yoy growth in July and August (see
Exhibit 7). We however note that the demand growth is marred by a favorable base effect and
erratic distribution of rainfall during the monsoon season. Cement prices declined by Rs14-15/bag
sequentially, typical of the weakness witnessed in the monsoons. Our channel checks, though, do
indicate some revival in cement prices in several pockets—especially those of West and North India.
Cement prices in South India continues to remain stable (see Exhibit 5 and 6).
Seasonal dip in profitability, cost pressure subside
We estimate a 42% sequential dip in profitability driven primarily by (1) 6% qoq decline in average
realizations on account of pricing weakness in the months of July and August and (2) 4% qoq
decline in volumes. We however see an abatement of input cost inflation, factoring a modest 6%
sequential increase in operating cost driven primarily by freight and raw material costs. A
significantly better pricing environment (17% yoy) will likely yield a 50% yoy jump in profitability
in 2QFY12E led by a strong revival in prices in South.
Remain selective, positive on names with relative valuation comfort
Cement stocks have outperformed the benchmark BSE Sensex by 30% in the last three months,
primarily on account of signals of demand revival as well as strong pricing discipline. We however
remain selective on names that offer relative valuation comfort. We reiterate Grasim Industries (at
4.7X FY2013E EBITDA), UltraTech Cement (6.6X FY2013E EBITDA against 8X for ACC and Ambuja
on CY2012E EBITDA) and India Cements (5.2X FY2013E EBITDA) as our preferred picks in the
sector on account of reasonable valuations compared to peers.
Cost inflation to subside, seasonal decline in profitability
2QFY12E will likely see a 6% sequential decline in realizations and 4% sequential decline in
volumes though abating inflation in input cost will be a respite. We discuss below our key
assumptions for 2QFY12E.
�� Volumes – We estimate volumes to decline 4% qoq on account of seasonal weakness.
However, 6% yoy growth will likely be driven by (1) strong volume growth of ACC and
Jaiprakash and (2) first signals of a potential demand revival with industry volumes
registering a strong 11% and 8% yoy growth in July and August. South India markets
continue to register negative growth with India Cement volumes likely to decline 7% yoy.
�� Realization – We factor a 6% sequential decline (~Rs13/bag) in average realization
taking cognizance of the weak pricing environment prevalent during the monsoon
months. Cement prices in South India remained robust as reflected in a marginal 3%
sequential decline in India Cement’s realizations.
�� Power and fuel cost – We estimate a marginal 3% sequential increase in Power and
Fuel cost. As highlighted in Exhibit 8, prices of imported coal have come off from their
highs of US$130/ton and would also be reflected in marginal cooling off in e-auction
prices of domestic coal. We however expect the full benefits of pricing decline to accrue
in ensuing quarters.
�� Freight cost – We build 4% sequential increase in freight cost. Although 2QFY12E will
witness the full impact of diesel price hike in June 2011, truck freight rates have remained
fairly stable owing to increased supply of trucks leading to increased competition
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cement
India
2QFY12E: Seasonally weak quarter. We recommend that investors be selective as the
cement sector braces for one of its most abysmal earnings season with (1) modest
volume growth due to a favorable base effect, (2) sequential price decline (Rs15-
20/bag), and (3) the burden of high overhead cost on a low volume base. Cement
stocks have moved up sharply over the recent past, despite the potential regulatory
action from the Competition Commission and a continued demand-supply imbalance
First hints of demand revival, prices weak in monsoon
Our coverage universe will register 7.7% yoy growth in volumes in 2QFY12E primarily driven by
(1) strong volume growth of ACC and Jaiprakash and (2) first signals of a potential demand revival
with industry volumes registering a strong 11% and 8% yoy growth in July and August (see
Exhibit 7). We however note that the demand growth is marred by a favorable base effect and
erratic distribution of rainfall during the monsoon season. Cement prices declined by Rs14-15/bag
sequentially, typical of the weakness witnessed in the monsoons. Our channel checks, though, do
indicate some revival in cement prices in several pockets—especially those of West and North India.
Cement prices in South India continues to remain stable (see Exhibit 5 and 6).
Seasonal dip in profitability, cost pressure subside
We estimate a 42% sequential dip in profitability driven primarily by (1) 6% qoq decline in average
realizations on account of pricing weakness in the months of July and August and (2) 4% qoq
decline in volumes. We however see an abatement of input cost inflation, factoring a modest 6%
sequential increase in operating cost driven primarily by freight and raw material costs. A
significantly better pricing environment (17% yoy) will likely yield a 50% yoy jump in profitability
in 2QFY12E led by a strong revival in prices in South.
Remain selective, positive on names with relative valuation comfort
Cement stocks have outperformed the benchmark BSE Sensex by 30% in the last three months,
primarily on account of signals of demand revival as well as strong pricing discipline. We however
remain selective on names that offer relative valuation comfort. We reiterate Grasim Industries (at
4.7X FY2013E EBITDA), UltraTech Cement (6.6X FY2013E EBITDA against 8X for ACC and Ambuja
on CY2012E EBITDA) and India Cements (5.2X FY2013E EBITDA) as our preferred picks in the
sector on account of reasonable valuations compared to peers.
Cost inflation to subside, seasonal decline in profitability
2QFY12E will likely see a 6% sequential decline in realizations and 4% sequential decline in
volumes though abating inflation in input cost will be a respite. We discuss below our key
assumptions for 2QFY12E.
�� Volumes – We estimate volumes to decline 4% qoq on account of seasonal weakness.
However, 6% yoy growth will likely be driven by (1) strong volume growth of ACC and
Jaiprakash and (2) first signals of a potential demand revival with industry volumes
registering a strong 11% and 8% yoy growth in July and August. South India markets
continue to register negative growth with India Cement volumes likely to decline 7% yoy.
�� Realization – We factor a 6% sequential decline (~Rs13/bag) in average realization
taking cognizance of the weak pricing environment prevalent during the monsoon
months. Cement prices in South India remained robust as reflected in a marginal 3%
sequential decline in India Cement’s realizations.
�� Power and fuel cost – We estimate a marginal 3% sequential increase in Power and
Fuel cost. As highlighted in Exhibit 8, prices of imported coal have come off from their
highs of US$130/ton and would also be reflected in marginal cooling off in e-auction
prices of domestic coal. We however expect the full benefits of pricing decline to accrue
in ensuing quarters.
�� Freight cost – We build 4% sequential increase in freight cost. Although 2QFY12E will
witness the full impact of diesel price hike in June 2011, truck freight rates have remained
fairly stable owing to increased supply of trucks leading to increased competition
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