Cement Sector - Review

[chetan]

Ambuja recorded strong volume growth of 14% YoY (down 2% MoM) in May 2010, driven by increased capacity (from 22mt in December 2009 to 25mt
currently) while Grasim’s (Consol) volume increased 6% YoY (up 1% MoM). ACC’s volume declined 4% YoY (down 2% MoM).

The industry recorded 8.3% despatch growth in May 2010 and 8.6% in the first two months of FY11 (April to May). We expect cement demand in FY11 to grow 12% (UBS’s FY11 GDP forecast for India is 9%) because of increased infrastructure spending (including housing).

Regionally, North India (21% of all India dispatches) continued its strong performance with dispatches growth of 22% Y-o-Y, the highest amongst all the regions. In our view, higher growth was primarily attributable to increases in dispatches to East and Central region, where consumption growth had been very robust in recent months. North dispatches c20% of its production to Central & East. Overall, the capacity utilization level remained healthy at 87%.

On the other hand, South India (37% of all India dispatches) continued to have poor dispatch performance, with growth of a mere 7%. We believe that demand growth rate may be much lower, as dispatches growth was helped by higher inter-regional movement to the East and West regions (12% of dispatches in FY10).

Central and East India, which collectively account for 28% of all India dispatches, are net importers from other regions (account for 32% of all India consumption). Though dispatches in Central India grew at moderate 8%, the capacity utilization level remained high in the absence of any significant
capacity additions.

HSBC on Various Cement Stocks,

We have Neutral (V) ratings on Ambuja Cements (ACEM, INR116, target price INR117) and Shree Cements (SRCM, INR2,083, target price INR2,356) and a Neutral rating on Ultratech Cement (UTCEM, INR982, target price INR1,081). We have Underweight (V) ratings on India Cements (ICEM, INR114, target price INR106), Madras Cements (MC, INR102, target price INR97), and ACC (ACC, INR869, target price INR790). Ambuja and Shree are our relative preferred plays in the group.

[komal]

Demand was sluggish on expected lines for Jul-10 with volumes flat to down 2% YoY on our estimate (data for large four companies). This was due
to demand slowing down as the monsoons season was in full swing coupled with the impact of demand moderation seen earlier (in May-10). In addition, the
high base also affected growth with demand having grown 10% YoY and down only 4% QoQ in Jul-09.

Cement prices have declined in the past few weeks given modest demand. More recently, we have seen marginal recovery (in the south in particular) given the sharp decline in the region. While prices are still off the recent peak, recovery amidst weak demand and new capacity manifests industry resilience, in our view. Prices could remain benign over the next couple of months, as the monsoon season sets in full, but we expect a recovery post the monsoons as demand picks up.

Morgan Said in a report that,
...the stocks could languish / trade weak in the near term given the likely weak / flat pricing. In our view, this will be a good entry opportunity given our view that prices will recover in F2H11. Key risk: Continued weakness in demand in F2011e. We expect growth in effective capacity to be muted given delays and time to ramp up new capacity.