Cement: 3QFY15 preview - the winter chill :: Kotak Securities

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3QFY15 preview –- the winter chill. A sequential decline of `7-10/bag in cement
prices will put the brakes on earnings momentum of cement companies that will see
little improvement in EBITDA/ton, compared to 2QFY15, as the advantage of a higher
volume base (post monsoon) would be lost to lower realizations. We expect sustained
volume trajectory (7% yoy) aided mainly by Ultratech, which continues to enjoy doubledigit
volume growth, helped by an expanded capacity base.

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Earnings trends a mixed bag for individual companies, depending on the regional mix
Individually cement companies will report a mixed bag of results with strong earnings growth
for Ambuja Cement and India Cement (EBITDA growth of 48% yoy and 37% yoy respectively)
aided by strong realizations in East and South India. Ultratech’s 18% growth in EBITDA is
contributed mainly by higher volume growth (12% yoy) on an expanded capacity base with
incremental contribution from the acquired capacities of Jaiprakash Associates. ACC will
continue to report drab earnings with little cheer on the volume (4% yoy) or realization fronts
(2% yoy).
Fuel and freight costs are likely to continue to offer a cushion for most cement companies as
the benefit of declining prices of imported coal and lower freight costs trickle into the cost
structure of companies.
Subdued prices for the quarter with a delayed price uptick following the monsoons
Cement prices were weak for most of the quarter, with declining prices across most regions
except South India. North India saw cement prices come off by as much as `15/bag and Central
India saw prices come off by `10/bag. South India was relatively stable with cement prices
holding up with an upward bias (`10/bag improvement). We expect pan-India players to report
a sequential decline in cement realizations (2-3% qoq), while prices for a South-based player
like India Cement will likely hold steady.
The delayed post-monsoon uptick is likely to materialize from January 2015; our interaction
with dealers corroborated our thesis on price increases, as most dealers were hopeful of cement
prices improving by `10-15/bag over the next fortnight.
Steady volume growth aided by expanded capacity base of Ultratech
We expect marginal improvement in cement offtake with 7% yoy growth in 3QFY15 compared
to 6% yoy in 2QFY15. Among companies under our coverage, we expect Ultratech to remain
an outlier, aided by expanded capacity – we expect 12% yoy volume growth in 3QFY15 (15%
yoy in 1HFY15).
Among other pan-India names, we expect 4% yoy growth for ACC (1% yoy in 2QFY15) and
3% yoy growth for Ambuja. Among regional players, we expect better volume growth in North
India while South based players will be laggards; we expect 8% yoy growth for Shree Cement
and 4% yoy growth for India Cement.
Rich valuations prevent us from turning constructive, though pricing action may be strong
Large pan-India companies continue to trade at rich valuations – ACC, Ambuja Cement and
Ultratech Cement trade at peak trading multiples - 11-13X EV/EBITDA on FY2016E earnings.
While we may agree with earnings trajectory, rich valuations prevent us from taking a
constructive view on the names.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily09012015ay.pdf