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Cement
India
2QFY12: On expected lines, underlying risks remain. Cement stocks under
coverage reported a 45% qoq decline in profitability reflective of the seasonal weakness
with realizations declining 6% qoq and volumes declining 5% qoq. Abatement of fuel
and freight costs was encouraging, though sustenance remains questionable with a
depreciating Rupee and potential upward revision of diesel prices. In our view, the
current trading multiples (18-20X P/E) of ACC and Ambuja do not take cognizance of
the continued weak demand (2.8% YTD) that could potentially test the pricing
discipline of the industry.
Seasonal dip in profitability though cost pressure subsides marginally
Our coverage universe registered a 45% sequential drop in profitability (+44% yoy) primarily due
to seasonal weakness in volumes and prices, with volumes declining 5% qoq and realization down
6% qoq. Profitability was further impacted by 48% sequential increase in raw material costs. We,
however, highlight that 2QFY12 witnessed first signs of abatement in power and fuel and freight
costs though we remain skeptical on sustenance at these levels given the depreciating currency
and impending diesel price hikes. On the realizations front, there were a few surprises with Shree
Cement (SRCM) reporting flat realizations (qoq) despite pricing weakness in key markets of North
India while Jaiprakash Associates reported a sharp 12% qoq decline in realizations (Rs22/bag) as
against 6-7% decline reported by regional peers.
Demand environment appears bleak in near term, utilization rates plummet
As we had highlighted in our preview (‘2QFY12E: Seasonally weak quarter‘), demand uptick in July
and August was an aberration (driven by temporal spacing of rainfall) and industry returned to
sub-2% volume growth in September (1.5% yoy) and October (0.6% yoy). Industry utilizations
have plummeted to 71% in 1HFY12, lowest in the past 10 years. Demand weakness has been
driven by South India with a negative growth of 7.5% in 1HFY12 (especially Andhra Pradesh with
20% yoy decline in consumption) and utilization rates at 61%. We note that West India remains
the most robust market with 12.3% yoy growth followed by North India at 7.2%. We further
highlight that management commentaries do not indicate any near-term uptick in demand.
Post-monsoon revival in prices a seasonal phenomenon
Our channel checks suggest a revival in cement prices across regions which are in line with general
seasonal trend of price hikes going into the peak construction season, and only compensates for
Rs15-20/bag decline in prices during the monsoon months.
Valuations not reflecting underlying risks, maintain our cautious stance
Cement stocks have outperformed the benchmark BSE Sensex by 16% in the past three
months. In our view, the current multiples do not factor the potential earnings pitfalls from
(1) prolonged slump in demand which could hurt the pricing discipline, (2) potential
intervention by Competition Commission of India (CCI) and (3) impending hike in diesel
prices and depreciating currency. ACC and Ambuja are trading at their peak-cycle multiples.
ACC is trading at 9X CY2012E EBITDA and US$151/ton on CY2012E production while
Ambuja Cement is trading at 8.3X CY2012E EBITDA and US$177/ton on CY2012E
production.
We reiterate Grasim Industries as our preferred pick primarily on account of inexpensive
valuations (4.7X FY2013E EBITDA) and stabilization of the VSF business. We also like India
Cement owing to relatively attractive valuations (4.4X FY2013E EBITDA and US$86/ton on
FY2013E production) despite challenging operating environment in South India.
Seasonal decline in realizations and volumes
2QFY12 saw a 6% sequential decline in realizations and 5% sequential decline in volumes
while 10% sequential increase in input cost was primarily driven by jump in raw material
and overhead costs. We discuss below key performance highlights of 2QFY12.
Volumes. Cement volume for our coverage universe increased 7% yoy primarily driven by
(1) strong 18% volume growth of ACC and Jaiprakash and (2) industry volumes
registering a strong 11% and 8% yoy growth in July and August. South India markets
continued to register negative growth with India Cement volumes declining 10% yoy.
Realization. Average realizations declined 6% sequentially (~Rs13/bag) primarily on
account of weak pricing environment prevalent during the monsoon months. Cement
prices in South India remained robust as reflected in a marginal 2% sequential decline in
India Cement’s realizations.
Power and fuel costs. Power and fuel costs increased marginally by 2% qoq as prices of
imported coal remained stable (some signs of moderation recently). However, the impact
of a depreciating currency could weigh in on importers of coal. 8% jump in power and
fuel costs for India Cement is primarily due to lower availibility of domestic coal for its AP
plants from SCCL mines (due to Telangana protests).
Freight costs. Freight costs declined 3% sequentially despite hike in diesel prices in June
2011. We note that truck freight rates have remained fairly stable owing to increased
supply of trucks, leading to increased competition.
Raw material costs. 2QFY12 saw a sharp sequential jump of 48% in raw material costs
with most of the players registering a large increase (barring India Cement). In our view,
part of this could be attributable to lower clinker production during the quarter (reflected
in moderate fuel cost inflation despite 10% currency depreciation).
Shree Cement and Jaiprakash’s realizations not reflective of industry trends
We were surprised by sequentially flat realizations of Shree Cements despite pricing
weakness in key markets of North India and 12% (Rs22/bag) qoq decline in realizations of
Jaiprakash as against 6-7% decline reported by other comparable peers. We note that other
North India-based players such as Prism Cement and JK Lakshmi Cement registered a
quarterly decline of 7% and 11%, respectively
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cement
India
2QFY12: On expected lines, underlying risks remain. Cement stocks under
coverage reported a 45% qoq decline in profitability reflective of the seasonal weakness
with realizations declining 6% qoq and volumes declining 5% qoq. Abatement of fuel
and freight costs was encouraging, though sustenance remains questionable with a
depreciating Rupee and potential upward revision of diesel prices. In our view, the
current trading multiples (18-20X P/E) of ACC and Ambuja do not take cognizance of
the continued weak demand (2.8% YTD) that could potentially test the pricing
discipline of the industry.
Seasonal dip in profitability though cost pressure subsides marginally
Our coverage universe registered a 45% sequential drop in profitability (+44% yoy) primarily due
to seasonal weakness in volumes and prices, with volumes declining 5% qoq and realization down
6% qoq. Profitability was further impacted by 48% sequential increase in raw material costs. We,
however, highlight that 2QFY12 witnessed first signs of abatement in power and fuel and freight
costs though we remain skeptical on sustenance at these levels given the depreciating currency
and impending diesel price hikes. On the realizations front, there were a few surprises with Shree
Cement (SRCM) reporting flat realizations (qoq) despite pricing weakness in key markets of North
India while Jaiprakash Associates reported a sharp 12% qoq decline in realizations (Rs22/bag) as
against 6-7% decline reported by regional peers.
Demand environment appears bleak in near term, utilization rates plummet
As we had highlighted in our preview (‘2QFY12E: Seasonally weak quarter‘), demand uptick in July
and August was an aberration (driven by temporal spacing of rainfall) and industry returned to
sub-2% volume growth in September (1.5% yoy) and October (0.6% yoy). Industry utilizations
have plummeted to 71% in 1HFY12, lowest in the past 10 years. Demand weakness has been
driven by South India with a negative growth of 7.5% in 1HFY12 (especially Andhra Pradesh with
20% yoy decline in consumption) and utilization rates at 61%. We note that West India remains
the most robust market with 12.3% yoy growth followed by North India at 7.2%. We further
highlight that management commentaries do not indicate any near-term uptick in demand.
Post-monsoon revival in prices a seasonal phenomenon
Our channel checks suggest a revival in cement prices across regions which are in line with general
seasonal trend of price hikes going into the peak construction season, and only compensates for
Rs15-20/bag decline in prices during the monsoon months.
Valuations not reflecting underlying risks, maintain our cautious stance
Cement stocks have outperformed the benchmark BSE Sensex by 16% in the past three
months. In our view, the current multiples do not factor the potential earnings pitfalls from
(1) prolonged slump in demand which could hurt the pricing discipline, (2) potential
intervention by Competition Commission of India (CCI) and (3) impending hike in diesel
prices and depreciating currency. ACC and Ambuja are trading at their peak-cycle multiples.
ACC is trading at 9X CY2012E EBITDA and US$151/ton on CY2012E production while
Ambuja Cement is trading at 8.3X CY2012E EBITDA and US$177/ton on CY2012E
production.
We reiterate Grasim Industries as our preferred pick primarily on account of inexpensive
valuations (4.7X FY2013E EBITDA) and stabilization of the VSF business. We also like India
Cement owing to relatively attractive valuations (4.4X FY2013E EBITDA and US$86/ton on
FY2013E production) despite challenging operating environment in South India.
Seasonal decline in realizations and volumes
2QFY12 saw a 6% sequential decline in realizations and 5% sequential decline in volumes
while 10% sequential increase in input cost was primarily driven by jump in raw material
and overhead costs. We discuss below key performance highlights of 2QFY12.
Volumes. Cement volume for our coverage universe increased 7% yoy primarily driven by
(1) strong 18% volume growth of ACC and Jaiprakash and (2) industry volumes
registering a strong 11% and 8% yoy growth in July and August. South India markets
continued to register negative growth with India Cement volumes declining 10% yoy.
Realization. Average realizations declined 6% sequentially (~Rs13/bag) primarily on
account of weak pricing environment prevalent during the monsoon months. Cement
prices in South India remained robust as reflected in a marginal 2% sequential decline in
India Cement’s realizations.
Power and fuel costs. Power and fuel costs increased marginally by 2% qoq as prices of
imported coal remained stable (some signs of moderation recently). However, the impact
of a depreciating currency could weigh in on importers of coal. 8% jump in power and
fuel costs for India Cement is primarily due to lower availibility of domestic coal for its AP
plants from SCCL mines (due to Telangana protests).
Freight costs. Freight costs declined 3% sequentially despite hike in diesel prices in June
2011. We note that truck freight rates have remained fairly stable owing to increased
supply of trucks, leading to increased competition.
Raw material costs. 2QFY12 saw a sharp sequential jump of 48% in raw material costs
with most of the players registering a large increase (barring India Cement). In our view,
part of this could be attributable to lower clinker production during the quarter (reflected
in moderate fuel cost inflation despite 10% currency depreciation).
Shree Cement and Jaiprakash’s realizations not reflective of industry trends
We were surprised by sequentially flat realizations of Shree Cements despite pricing
weakness in key markets of North India and 12% (Rs22/bag) qoq decline in realizations of
Jaiprakash as against 6-7% decline reported by other comparable peers. We note that other
North India-based players such as Prism Cement and JK Lakshmi Cement registered a
quarterly decline of 7% and 11%, respectively
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