Cement - March 2013 quarter earnings preview - BRICS

Lacklustre demand: Our interaction with cement manufacturers and dealers reveals that cement demand failed to rebound in Q4 after two successive quarters of weakness. Consequently, most companies are likely to report a volume growth in the range of -2% and 2% yoy.

Volatile prices: Poor demand exerted pressure on cement prices in Q4. Manufacturers had raised prices in January and early February in anticipation of a pick-up in demand, but prices continued to slide thereafter until March end. We expect all India prices to be up ~1.8% yoy, but remain flat qoq in Q4.

Cost pressures: In Q4, cement companies will be impacted by the monthly diesel price hikes and increase in rail freight tariffs effected in Feb 2013. However, most players are likely to benefit to some extent from the sharp fall in international coal prices (down ~14% on landed cost basis in Q4), despite a rise in domestic coal rates and continued supply shortage.

PAT expected to be down 4% yoy: Cement companies in the BRICS universe are expected to report a revenue growth of 5% yoy, but a decline of ~4% yoy in PAT for Q4. All companies are likely to witness margin contraction in Q4.

Valuations: Cement demand shows no signs of recovery and the oversupply scenario will ensure that prices remain under pressure. Further, the next couple of quarters could see a yoy decline in prices, given last year's high base. India Cements remains our only Buy, based on the stock's inexpensive valuations.

Source : Equity Bulls

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