Cement looks solid

SECTOR REVIEW

The increase in despatches is set to drive the earnings growth of cement companies.

The demand for cement in the country continues to grow and despatches of major companies have been showing a concrete trend. With strong demand having firmed up cement prices, shares of the companies have done well on the bourses.

Over the past month, the major gainers from the sector have been Grasim (up 13.16 per cent), Gujarat Ambuja (13.77 per cent), ACC (14.49 per cent), UltraTech (16.57 per cent) and India Cements (5.81 per cent). With the continued thrust on housing and infrastructure, the outlook is positive.

Cement despatches registered a growth of 18 per cent y-o-y in Feb FY06 and 11.8 per cent y-o-y for the first eleven months of FY06. In comparison, the growth seen in FY05 was just under 7 per cent. The Cement Manufacturers Association (CMA) numbers show that despatch figures of some cement majors are on an upswing. 
 

CEMENT PRICES
Rs per 50kg bag	Jan 05	Feb 06
All India	160	170
North	165	180
Central	154	166
East	155	165
West	169	179
South	155	159
Source: CMA

For instance, ACC (up 8 per cent y-o-y for the eleven months ended February FY06), Grasim (up 10.8 per cent) and Madras Cements (up 23.6 per cent).

According to an analyst with HDFC Securities, the growth in despatches has been substantial and over and above the normal cyclical growth. According to AK Jain, executive director, ACC, during the last three months the industry has grown in double digits.

Analysts point out that the total capacity in the country is about 162 million tonne (MT). The analyst from HDFC Securities says that the 12-month average capacity utilisation is about 94 per cent.

Rajan Kumar, analyst at Networth Stock Broking, says that a total of 30 MT additional capacity is expected to come up during FY06-08 (6.1 MT, 10.7 MT and 13.2 MT in FY06, FY07 and FY08 respectively). The maximum capacity is coming up in the north at 12.9 MT, followed by 8.5 MT in the east, 5.9 MT in the south and 2.7 MT in the west. 
 

PRODUCTION/DESPATCHES
Million tonne	Production			Despatches			Utilisation (%)
	Apr -Feb FY06	Apr -Feb FY05	Chg (%)	Apr -Feb FY06	Apr -Feb FY05	Chg (%)	Apr -Feb FY06	Apr -Feb FY05
Gujarat Ambuja	13.56	13.11	3.43	13.59	13.08	3.89	99.55	95.86
ACC	16.16	15.03	7.51	16.20	14.99	8.07	94.65	91.05
Grasim	13.26	11.93	11.14	13.25	11.93	11.06	104.29	94.62
UltraTech	12.27	11.62	5.59	12.27	11.56	6.14	91.93	93.83
India Cements	7.63	5.83	30.87	7.65	5.78	32.35	96.25	81.65
Lafarge	4.13	3.94	4.82	4.11	3.94	4.31	96.99	98.11
Shree Cements	2.81	2.72	3.30	2.80	2.74	2.18	100.00	114.33
Madras Cements	4.09	3.33	22.82	4.10	3.32	23.49	97.45	77.69
Birla Corp	4.63	4.54	1.98	4.63	4.52	2.43	90.47	104.12
Dalmia Cements	1.41	1.18	19.49	1.42	1.18	20.33	124.35	104.20
Kesoram Industries	2.82	2.81	0.35	2.78	2.81	-1.06	113.50	146.13
Zuari Cements	2.55	2.30	10.86	2.55	2.29	11.35	88.50	75.87
Source: CMA

The compaines expanding capacity in the north include ACC and Grasim, while those in the east include ACC, Birla Corporation and Lafarge. Dalmia Cement, Kesoram Industries and Zuari Cement are expanding in the south. UltraTech is debottlenecking in the west.

Jain says, "We are currently working close to our full capacity of 19.03 MT. Last year, we completed a modernisation project in Jharkhand. Currently, we are augmenting the capacity at our plants in four locations, along with a captive power plant in Rajasthan." The current capacities of other major players are Gujarat Ambuja (13 MT), Grasim (13.5 MT) and UltraTech (17 MT).

Strong demand is expected to keep the demand-supply gap narrow. In the north, with companies operating close to full capacity, the situation is likely to remain tight till FY08. After that with new capacities, there could be a surplus situation leading to a possible minor correction in prices.

However, volume growth is expected to compensate for the same. The east and west would continue to operate at over 90 per cent capacity. In the south, demand-supply is moving towards parity.

Kumar says that prices have risen by about Rs 15-30 per bag in phases across west and north over last 2-3 months. Though much was due to tight supplies, increase in freight costs due to the Supreme Court verdict against overloading, also contributed to the rise.

There are expectations of a 15 per cent y-o-y growth in prices in FY07. Earnings growth would be driven by favourable prices and volume growth of about nine per cent.

Jain points out, "Cement prices fluctuate from region to region and season to season. In the last few months we have seen a positive trend as prices have moved up by Rs 10-15 per bag in different markets."

Analysts believe that the biggest beneficiaries would be companies like ACC (with its pan-India presence), Gujarat Ambuja (with better prices in the west) and Shree Cement (in the north).

As the cement industry is booming, foreign players may flock to the country. Heidelberg Cement is the latest to enter the arena with its JV with Indorama Cement, after Holcim entered India, over a year ago. Heidelberg's JV will run the grinding unit of Indorama in Maharashtra and proposes to build a clinker plant in Gujarat.

According to Jain, "In the last few years the industry has seen significant consolidation involving more than half its capacity. I am sure foreign investors will continue to show interest."

The industry is dominated by the top four players in the country commanding a market-share of about 40 per cent, which gives them good pricing power. Some analysts feel that not much action is expected among domestic players. Valuations have run quite high. It would be difficult for players to acquire assets.

The possibility of Birla Group cement companies merging together, remains. Kumar feels that cost reduction mainly hovers around reducing energy cost. HDFC Securities' analyst expects cement companies to post strong numbers for the fourth quarter, despite higher freight costs.

An area of concern is a possible fall in cement exports to West Asia, as 30 MT capacity is expected to be added there. This could impact earnings of Gujarat based companies from FY08 onwards.

Gujarat Ambuja is trading at 10.06x. The valuations of most other companies are comparable with ACC at 26.05x, Grasim at 22.73x and India Cements at 26.10x.

Analysts feel that the growing demand provides further upside for cement stocks over the next one year.