Cement - On a Structural Uptrend; Sector Update :: Edelweiss report

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The Indian cement sector is on a structural uptrend with multiple positives like:

• Easing cost pressures: The 14% drop in diesel prices from recent peak (led by fall in crude oil) and a benign outlook going ahead is a ‘BLISS’ for the sector. The fuel directly impacts all major costs and our indicative working suggests cost savings of ~INR111/t for the industry (see slide no. 5). Despite factoring in the disappointment in cement prices in Q2/Q3 of FY15, we still expect marginal upgrades in our FY16 EBITDA/t estimate for our coverage universe in the range of 2-3%.
• Positive demand outlook: Expectation of a economic revival and multiple positive announcements (like concrete roads, smart cities, houses for all etc) keep demand outlook positive. With FY15YTD growth of ~8.5%, we maintain 8%/9% industry demand growth estimate for FY15/FY16 and introduce FY17 growth estimate of 10%.
• EBITDA/t to rise to a new high-a new normal of INR1,500 from FY17: With slowing pace of capacity addition, industry utilisation is set to turn positive in FY17 (rising to 81% at an all India level from 74% in FY15 and to 87% in North from 81% in FY15) driving EBITDA/t to a new high. Given that it takes 30-36 months for a new plant, there are high chances of a further rise in industry utilisations in FY18, if demand growth remains intact. Historically, industry upcycle drives EBITDA/t to a new high, making it a new normal. e.g: INR1,000/t became the new normal in the FY05-10 upcycle from ~INR300-500 in prior years. We estimate INR1,500/t to be the new normal from FY17 for large caps.
• Implementation of GST can be margin accretive: From a total tax incidence of ~27-29% on MRP, the GST (Goods and Services Tax) rate is proposed to be ~20-25%, driving up hopes of a rise in net realisations for the industry.
• Rolling over valuations to FY17E: With benefits of cost declines in FY16 and rising industry utilisations in FY17, EBITDA of our coverage universe is estimated to rise at a CAGR of 25% - 45% over FY15-17. Rolling over valuations to FY17 estimates, we turn positive on the sector with UltraTech Cement and JK Cement as our top picks.
• Opportune time: Cement prices will be on seasonal uptrend from mid-January 2015 for the next few months owing to the busy season. While historical evidence indicates relative outperformance for the sector during this period, given the structural positives mentioned above, we view it as an opportune time to be long-term positive on the sector.

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https://www.edelweiss.in/research/Cement--On-a-Structural-Uptrend;-Sector-Update/28019.html