Cement loosens grip again

With a meaningful demand recovery expected only around mid-CY11, analysts expect the demand-supply mismatch to prevail and stocks to underperform broader markets in the near term.

After a superlative performance in October, when the overall dispatches of the cement industry grew over 18 per cent, the sector has taken a beating in November. The November dispatches by most cement majors remained in negative territory, except for ACC (see table). In fact, on a sequential basis, the top five cement players have reported a 19.8 per cent drop in combined dispatches, indicating that demand is yet to pick up sufficiently to support prices. While analysts expect a demand recovery by mid-CY2011, most of them currently have a neutral to bearish view on the sector, as the valuations are not cheap.

Demand turns weak again
As per the dispatch numbers of the top producers, the November performance once again shows that the slump in demand continues. Barring October, demand in the first half of 2010-11 was muted. The performance in November, however, is partly attributed to unseasonal rains cross the country, the festival season of Diwali that leads to lower construction activity and the absence of major infrastructure projects taking off. Analysts say the weak demand has seen the average prices correct by over Rs 5-10 per 50-kg bag from around Rs 235 at the end of November, which could correct further in December.

While 50 MT of new capacity was added in the last few years ending FY10, another 62 MT is expected to be added during FY11-13. Cement consumption, on the other hand, has grown at a slow pace of 5 per cent year-on-year (ranging 1.6-8.5 per cent) during the first half of FY11 (against a CAGR of 9.2 per cent during FY05-10 aided by demand from the housing and infrastructure sectors) leading to a demand-supply mismatch, say analysts. Capacity realisations have declined to 77 per cent and the prices corrected over 10 per cent during June-September. Expecting the demand-supply mismatch to continue till the second half of FY12 before a recovery sets in, analysts expect cement stocks to underperform the broader markets in the near term.

ACC
ACC, which saw flat volume growth during the first nine months of CY10, added 3 MT capacity recently in Karnataka, taking its capacity to 27 MT. Another 3 MT will be commissioned shortly in Maharashtra. Analysts at Ambit anticipate a 0.8 per cent decline in ACC’s volumes during CY10, which is seen improving 14.1 per cent in CY11. The relatively soft realisations, especially in south India, are likely to offset some of the volume gains. Captive power capacities touching 350 MW should be adequate to meet 85 per cent of the requirement while only 10 per cent dependence on imported coal is also positive. Overall, analysts estimate the CY10 earnings to decline to Rs 56 before rising to about Rs 64 per share in CY11; most of them have a sell or hold rating on the stock.

Ambuja Cements
Ambuja Cement is expanding capacities in the north and the east, which will take its total capacities to 27 MT by end-CY10. Owing to its minimal presence in the south, analysts estimate flat realisations for CY10 before a 2 per cent recovery in CY11. The commissioning of two clinkers of 4.4 MT in CY09, lower coal imports and increased captive power capacity by 100 MW are seen helping margins. Its earnings are estimated to expand 10 per cent during CY10 and remain flat in CY11; most analysts have a sell or hold rating on the stock.
 

DESPATCHES SLIP
	Despatches in Nov’10	% chg y-o-y	% chg m-o-m	Price (Rs )	P/E (x)
ACC *	1.7	4.8	-9.4	976	15.0
Ambuja *	1.4	-8.6	-18.9	136	15.8
JP Associates	1.1	13.2	-26.0	110	25.0
Shree Cement	0.7	-8.0	-24.7	2030	17.8
Ultratech	2.7	-9.3	-22.2	1107	17.8
* PE is based on CY10 earnings, for others it is FY11;  Dispatches for November 2010 month in million tonnes  Source: Analyst reports, Bloomberg

Ultratech Cement
Ultratech, with 52-MT capacity and strong sales in the south and the west, is likely to feel the heat of lower price realisations in the south. Analysts estimate a 5 per cent decline in realisations in FY11 before a 1 per cent rise in FY12. A surge in coal prices (impacting power and fuel costs) can be taken care of by captive power generation of up to 85 per cent. With almost negligible debt (net basis), the interest costs will also be minimal. With FY11 earnings estimated at Rs 58, valuations aren’t cheap.

Shree Cement
Shree Cement, which will have 13-MT cement capacity by end-December 2010, is also seen benefiting from merchant power sales of around 110 MW. Enhanced power capacities of 350 MW will take total capacities to 560 MW by December 2011. Analysts estimate power revenues to increase nine times over FY09-12 and contribute 23 per cent to revenues and 32 per cent to Ebitda in FY13. Analysts estimate the cement and clinker offtake to increase 7.3 per cent during FY11-13. While the cement realisations are seen declining 4.5 per cent in FY11, they are expected to remain flat during FY12 before increasing 7 per cent in FY13. While the FY11 earnings are expected to fall about 30 per cent, a rise of over 40 per cent is expected in FY12. Most analysts are positive on the stock.