Building Materials - Q4FY14 Results Preview - Cement and paints to be stagnant, tiles to look up - Centrum

Cement and paints to be stagnant, tiles to look up

We expect muted performance from cement companies under our coverage universe on a YoY basis and expect contraction in EBITDA margins for all companies except India Cements. However, the companies would post sharp improvement in OPM and profits on a sequential basis led by steep increase in realization post mid-Feb. Paint companies are expected to post muted earnings growth due to higher raw material costs. We have downgraded the rating on ACC to Sell (from Hold) and Berger Paints to Hold (from Buy). We expect strong numbers from Kajaria Ceramics and upgrade our rating on the stock to Buy from Hold earlier.

- Positive and negative earnings surprises: We are expecting positive earnings surprises from Shree Cement (at the operational level), Berger Paints and Kajaria Ceramics. We expect Cement companies to post significant improvement in profit on a sequential basis led by steep improvement in realization and sales volume. However, we are expecting negative earnings surprises from Grasim Cement due to cost pressure in the VSF segment and JK Cement due to lower sales volume from South based plant which has higher profitability.

- Cement companies - Cement companies are expected to benefit from sharp increase in realization post mid-Feb 2014. Cement price increased 7.9%/3.1%/5.1% QoQ in the North/Central/East regions. Average realization for our coverage universe is expected to increase 2.4% YoY. Sales volume is expected to increase 0.8% YoY led by 17.3%/2.4% YoY increase in sales volume of Shree Cement/UltraTech. However, we expect average operating margin to contract by 64bps YoY to 19.3% led by increase in operating costs (raw materials and freight).

- Other building materials (Paints and Tiles): We are expecting muted growth in profit from Paint companies except for Berger Paints. We expect sales volume in the decorative segment to grow by 5-6% YoY and realization to improve by ~4% YoY. We are expecting Kajaria Ceramics to post strong numbers due to increase in sales volume, realization and appreciation in rupee during the quarter which would result in moderation in energy costs.

- Recommendation and key risks: Cement stocks have run up sharply led by strong prices during the quarter and we believe that risk-reward remains unfavourable for cement stocks post the run-up and maintain a negative view. We have downgraded rating on ACC to Sell from Hold. We have also downgraded rating on Berger Paints to Hold post appreciation of 12% in the stock price since our initiation report on Feb 18. We are upgrading our rating on Kajaria Ceramics to Buy as we believe that the company will get the benefits of the shut-down of coal based capacities in Morbi, appreciation of rupee and strong realization. The key risks to our rating for cement companies could be sharp increase in Cement prices. The key upside risk for Paint companies could be sharp decline in crude prices and the key downside risk could be irrational move by any player which may put pressure on pricing.

Source : Equity Bulls

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