Strong quarter led by higher realizations - Centrum

Cement - Strong quarter led by higher realizations

We expect aggregate sales volumes of our cement universe to grow 6.5% YoY (and 9% QoQ) to 28.8mt. Average cement realization is expected to improve 19% YoY (and 4.9% QoQ) to Rs3,858/tonne led by price hikes by cement manufacturers across India. Pan-India average price is expected to increase by Rs17/bag QoQ (~7% QoQ) to Rs264/bag. The higher cement price and sales volume would lead to 4pp YoY (and 1.9pp QoQ) improvement in average operating margin of our coverage universe to 19.6%. Cement demand continues to remain sluggish with a 4.2% YoY growth for the period April-November '11. Cement price corrected by Rs15-25/bag in the North, Central and West regions in December '11 after the hike of Rs32-35/bag in these regions between September and November '11. The continued slowdown in housing and real estate construction activities remain a concern for the sector and we don't expect steep price hikes from manufacturers due to lower utilization rates and sluggish demand. We maintain Sell on ACC, Ambuja Cement and UltraTech considering expensive valuations. We have a Hold rating on Grasim Industries and Shree Cement. We prefer mid-caps and have a Buy on Orient Paper, India Cements and JK Cement due to attractive valuations.

Volume growth driven by low base of last year: Aggregate sales volume of our coverage universe is expected to grow 6.5% YoY (and 9% QoQ) mainly due to the low base of last year to 28.8mt. Among large players, Ambuja Cement is expected to register volume growth of 10% YoY. We expect 14.9% YoY and 11.6% YoY volume growth for Orient Paper and Shree Cement respectively in the quarter.

Steep increase in realization expected: Average cement of our coverage universe is expected to increase 19% YoY (and 4.9% QoQ) to Rs264/bag due to price hike across India. On a sequential basis, cement price increased 9-12% QoQ in North, Central and East regions. In South and West regions, price increased by 1.5-3% QoQ in this quarter.

Higher realization will lead to operating margin expansion: Average operating margin of our coverage universe is expected to improve 4pp YoY to 19.6% led by higher realizations in the quarter. Higher realization would lead to Rs150-300/tonne improvement in EBITDA/tonne for the companies under our coverage.

Prefer mid-caps due to attractive valuations: Large-cap cement companies are trading at a premium to their mean trading multiples, which we believe is unwarranted considering the weak demand environment, expected volatility in realizations and decline in return ratios. We maintain Sell on ACC, Ambuja and UltraTech. We have a Hold rating on Grasim Industries and Shree Cement. We maintain Buy on mid-caps (Orient Paper, India Cements, and JK Cement) under our coverage due to attractive valuations.

Source : Equity Bulls

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