Cement - Strong quarter ahead led by higher prices - Q2FY13 Results Preview - Centrum

We expect aggregate sales volumes of our coverage universe to grow 3% YoY to 27mt primarily led by higher volume growth by Shree Cement, JK Cement and Orient Paper. Average cement realization is expected to improve 15.2% YoY to Rs4,238/tonne led by sharp improvement in cement prices across India (except South region). Higher realization will lead to 4.7pp average operating margin expansion for our coverage universe. Industry despatches during the quarter is expected to increase 1.6% YoY to 51.7mt. We believe cement companies will continue to post robust numbers on the back of higher prices. We believe that effective utilization rate of the industry will gradually improve 81% by FY15E against 76.9% in FY12E. Improvement in utilization rate will help manufacturers to increase prices and offer higher profits for the companies. In XIIth five-year plan, the government has increased infrastructure spending by 99% to US$1,025bn which would also aid cement consumption growth. The capex cycle of industries will also improve post expected revival in Indian economy. We maintain our positive stance on the sector and upgrade our rating on ACC and Ambuja to Buy from Neutral earlier. We maintain Buy on other companies under our cement coverage universe.

- Mid-size players to lead volume growth of our coverage universe: Aggregate sales volume of our coverage universe is expected to grow 3% YoY led by 17-20% YoY volume growth for Shree Cement, JK Cement and Orient Paper. Among large cement players UltraTech is expected to register volume growth of 2.8% YoY, whereas, sales volume of ACC is expected to decline 4.7% YoY.

- Strong realization growth expected: Realization of companies under our coverage is expected to increase 15.2% YoY led by strong price growth across India (except South region). On a sequential basis, we expect cement prices to remain flat in the quarter.

- Higher realization will lead to sharp improvement in EBITDA margins: Led by strong prices, average operating margin of our coverage universe is expected to improve 4.7pp YoY to 20.5%. Freight cost is expected to increase due to 23% increase in base freight by Indian Railways in March and domestic coal price is expected to remain higher due to price hikes last year. Imported coal price is expected to decline 11% YoY due to drop in prices. Among large cement players, Ambuja Cement is expected to report the highest margin improvement of 9pp YoY. Among mid-caps, we expect 6.1pp margin improvement for both Shree Cement and JK Cement driven by steep increase in volume and realization.

- Capacity utilization set to improve gradually which will support higher prices: Effective utilization rate of the industry will gradually improve 81% by FY15E against 76.9% in FY12E. Improvement in utilization rate will help manufacturers to increase prices and thus offer higher profits for the companies. In XIIth five-year plan, the government has increased infrastructure spending by 99% to US$1,025bn which would also aid cement consumption growth. We believe that domestic consumption will grow at 8-9% over next two years.

- Roll forward valuation multiple to Sept-14, maintain positive stance on the sector: We roll forward our valuation multiple to Sept-FY15E and maintain our positive stance on the sector. We believe that margin of cement companies will improve going forward due to better prices and higher sales volume. We have revised rating on ACC and Ambuja to Buy from Neutral earlier and maintain Buy rating on other companies under our coverage universe of cement sector. Our top-picks amongst large-cap cement companies are UltraTech, Grasim Industries and Shree Cement. Amongst mid-cap companies, our top pick is JK Cement.

Source : Equity Bulls

Keywords