Cement Sector Update - Supply disruption leads to sharp price hikes - Centrum

We believe the current rally in cement stocks is largely due to external factors. We are not surprised with the recent uptick in demand as we believe it is more to do with seasonality (in line with our expectations). Cement dealers say recovery in demand is still 2-3 quarters away. They add that the recent buoyancy in cement prices was largely due to the closure of ~6mt capacity of Binani Cement and partial closure of Ambuja Cement's capacity of ~6mt in Himachal Pradesh. We believe, prices could correct if the supply situation improves. We downgrade the rating on UltraTech and Shree Cement to Sell from Hold on expensive valuations.

Steep improvement in cement prices: Average pan-India price increased 3% MoM to Rs316/bag in Mar '14 led by sharp price hikes in the North and West (especially Gujarat) regions. The steep hike in cement price in the North region was largely due to the easing of supply rather than improvement in demand (except seasonal improvement). Price in the South region remained under pressure due to a sharp drop in price in Hyderabad led by continued low demand and oversupply. In the Central / East region, average cement price was up 2.8%/0.5% MoM respectively.

Average price 4.5% YoY higher in Q4FY14- Compared to Q4FY13, average pan-India price is higher by ~Rs13/bag (4.5%) YoY to Rs306/bag in Q4FY14. In Q4FY14, average price in the North / Central/East region is up 9.9%/4.9%/5.3% YoY. In West and South regions, the average price is up 2.5% and 0.3% YoY respectively during the quarter. On a sequential basis, price in North/Central/East region is up 7.9%/3.1%/5.1% QoQ during the quarter. In the South region, average price is down 8% QoQ.

Sluggish supply leads to sharp price hikes - regional players' profits to improve: Sharp hikes in cement price in the North and West region (Gujarat) was primarily due to a) closure of ~6mt capacity of Binani Cement over sales-tax related issues b) partial closure of Ambuja Cement's 6mt capacity in Himachal Pradesh following orders by the Ministry of Environment & Forests (MoEF), despite a stay order granted by the High Court. Though Binani's Cement plant is expected to resume operations leading to cooling off in cement prices, continued closure could cause significant upgrades in profits of regional players - Shree Cement, JK Lakshmi Cement and JK Cement (60% capacity in the North region).

Outlook & Valuation - Downgrade Shree Cement and UltraTech to Sell: We downgrade Shree Cement and UltraTech to Sell from Hold after the steep run up in stock prices and expensive valuations. We believe the recent rally in cement stocks provide an exit opportunity as demand has not improved significantly. We understand that earnings of cement companies are highly sensitive to prices and any upside surprise will trigger a rally in stocks. But, we prefer to wait for signs of demand revival and pricing stability before turning positive.

Source : Equity Bulls

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