 "Concerns persist over cement sector revival")
The cement pack has underperformed visibly in the recent past due to worries over weak demand and realisations. While the early onset of monsoon has hurt demand, the woes have increased with the deterioration in economic sentiment that has hit the entire cement pack.
Not surprisingly, stocks of ACC, Ambuja Cements, UltraTech and Shree Cement touched 52-week lows last weekend (22 & 23 August). Though the steep correction has made these stocks attractive and most negatives appear to be priced in, any re-rating hinges on recovery in cement pricing and volumes which may not happen in a hurry. Analysts were expecting demand to revive after monsoons and in anticipation of pre-election spending. However, many of them have turned apprehensive of the same.
Mihir Jhaveri and Prateek Kumar at Religare Institutional Research believe that after muted volume growth in the June quarter, slump could continue till end of FY14. Thus, the near-term outlook remains weak. They observe that cement stocks have corrected sharply over the past couple of months due to growing macro concerns over weakening GDP growth and unbridled rupee depreciation, further dimming the outlook for cement demand. Though they remain structurally positive on the sector over a two-three year horizon, they are cautious in the near term, owing to India's deteriorating economic and political milieu.
Analysts at Kotak Securities, too, maintain a cautious stance, with demand still remaining sluggish and believe improved pricing could stem the downside. They add that limited visibility on recovery of the investment cycle continues to dampen the prospects of demand revival.
In fact, according to CLSA, cement is among the sectors that can see downgrades as the RBI is unlikely to reverse its stance in a hurry and government spending cuts are likely.
In this backdrop, analysts at Religare have cut FY14 and FY15 volume growth estimates for the sector to five per cent and nine per cent, compared to earlier estimates of seven per cent and 10 per cent, respectively.
Pricing power is essential for the companies to improve profitability. During the first quarter, while ACC saw flat volume growth, Shree Cement saw six per cent decline, and UltraTech and Ambuja saw their volumes decline by three per cent each, compared to the year ago quarter. The per tonne realisations declined five-seven per cent for most companies, with the exception of UltraTech that saw flat realisations.
Nevertheless, cement manufacturers saw their per-tonne profitability decline 17-38 per cent. Higher transportation costs due to rail freight and diesel price increases, higher clinker utilisation due to early onset of monsoon, Coal India raising domestic coal prices and rupee depreciation negating the benefits of lower imported coal costs were among key reasons. The situation might not be better in the September quarter, say analysts.
Sanjeev Kumar Singh at Centrum Broking observes that per-bag cement prices are yet to see recovery.
In a quarterly results review note dated August 19, Edelweiss said, "Cost per tonne remained under control (in June quarter). However, due to the high base of last year, Ebitda for companies dipped in the 18-31 per cent range. The current quarter, too, is high base and with no improvement in demand and prices so far, earnings are expected to be disappointing in the second quarter of FY14 as well. With limited visibility of a sharp recovery post monsoon, we are cautious on the sector." After the results, Edelweiss has downgraded ACC, Ambuja and UltraTech stocks from buy to hold.
All eyes, thus, are set on how things pan out after the September quarter.
Preferred choices
In the event of a recovery in demand, UltraTech, is well poised to gain more as it has already increased capacity by 2.5 million tonnes during the June quarter and is in the process of adding more in the current quarter. ACC and Ambuja will see their major capacity additions by 2015. Shree Cement also remains a preferred choice of analysts. While it is a regional (predominantly north-based) player, it remains unaffected by the weak prospects in the south. Further, its profitability from power segment has also improved significantly points out Singh at Centrum Broking.
Anil Srivastava at Nirmal Bang Institutional Equities believes that UltraTech and Shree Cement stocks are trading at replacement costs of $120-125 a tonne based on the rupee-dollar exchange rate of 58 while the rupee has depreciated to over 64 (implying further fall in dollar valuations). In case of any positive triggers, these two stocks can lead the rally, he adds.
Not surprisingly, stocks of ACC, Ambuja Cements, UltraTech and Shree Cement touched 52-week lows last weekend (22 & 23 August). Though the steep correction has made these stocks attractive and most negatives appear to be priced in, any re-rating hinges on recovery in cement pricing and volumes which may not happen in a hurry. Analysts were expecting demand to revive after monsoons and in anticipation of pre-election spending. However, many of them have turned apprehensive of the same.
Mihir Jhaveri and Prateek Kumar at Religare Institutional Research believe that after muted volume growth in the June quarter, slump could continue till end of FY14. Thus, the near-term outlook remains weak. They observe that cement stocks have corrected sharply over the past couple of months due to growing macro concerns over weakening GDP growth and unbridled rupee depreciation, further dimming the outlook for cement demand. Though they remain structurally positive on the sector over a two-three year horizon, they are cautious in the near term, owing to India's deteriorating economic and political milieu.
Analysts at Kotak Securities, too, maintain a cautious stance, with demand still remaining sluggish and believe improved pricing could stem the downside. They add that limited visibility on recovery of the investment cycle continues to dampen the prospects of demand revival.
In fact, according to CLSA, cement is among the sectors that can see downgrades as the RBI is unlikely to reverse its stance in a hurry and government spending cuts are likely.
In this backdrop, analysts at Religare have cut FY14 and FY15 volume growth estimates for the sector to five per cent and nine per cent, compared to earlier estimates of seven per cent and 10 per cent, respectively.
Pricing power is essential for the companies to improve profitability. During the first quarter, while ACC saw flat volume growth, Shree Cement saw six per cent decline, and UltraTech and Ambuja saw their volumes decline by three per cent each, compared to the year ago quarter. The per tonne realisations declined five-seven per cent for most companies, with the exception of UltraTech that saw flat realisations.
Nevertheless, cement manufacturers saw their per-tonne profitability decline 17-38 per cent. Higher transportation costs due to rail freight and diesel price increases, higher clinker utilisation due to early onset of monsoon, Coal India raising domestic coal prices and rupee depreciation negating the benefits of lower imported coal costs were among key reasons. The situation might not be better in the September quarter, say analysts.
Sanjeev Kumar Singh at Centrum Broking observes that per-bag cement prices are yet to see recovery.
In a quarterly results review note dated August 19, Edelweiss said, "Cost per tonne remained under control (in June quarter). However, due to the high base of last year, Ebitda for companies dipped in the 18-31 per cent range. The current quarter, too, is high base and with no improvement in demand and prices so far, earnings are expected to be disappointing in the second quarter of FY14 as well. With limited visibility of a sharp recovery post monsoon, we are cautious on the sector." After the results, Edelweiss has downgraded ACC, Ambuja and UltraTech stocks from buy to hold.
All eyes, thus, are set on how things pan out after the September quarter.
Preferred choices
In the event of a recovery in demand, UltraTech, is well poised to gain more as it has already increased capacity by 2.5 million tonnes during the June quarter and is in the process of adding more in the current quarter. ACC and Ambuja will see their major capacity additions by 2015. Shree Cement also remains a preferred choice of analysts. While it is a regional (predominantly north-based) player, it remains unaffected by the weak prospects in the south. Further, its profitability from power segment has also improved significantly points out Singh at Centrum Broking.
Anil Srivastava at Nirmal Bang Institutional Equities believes that UltraTech and Shree Cement stocks are trading at replacement costs of $120-125 a tonne based on the rupee-dollar exchange rate of 58 while the rupee has depreciated to over 64 (implying further fall in dollar valuations). In case of any positive triggers, these two stocks can lead the rally, he adds.