India’s three cement big-wigs, namely, UltraTech, ACC and Ambuja Cements have reported strong performance on the bourses since end-May. UltraTech has led the pack giving returns of close to 42%, while Ambuja delivered about 31% and ACC around 23%. This spectacular run-up has been led by improving price realisations, better demand and delay in monsoons, helping the cement majors post strong year-on-year growth in revenues and profitability for the quarter ending September 2012. Going ahead, analysts are positive on their prospects, but are more bullish on UltraTech given better revenue visibility as well as the overhang on ACC and Ambuja due to speculation over increase in royalty outgo to their parent, Holcim. However, if the royalty issue doesn’t materialise, it could provide a trigger, especially for ACC.
Realisations to remain firm
With monsoon season having ended, cement prices have started improving already. As per channel checks by Elara Capital, prices have already increased by Rs 9-25 per bag (of 50 kg) in Lucknow, Jaipur, Bhopal and Delhi in October. Though South is seeing some weakness, prices are likely to catch up there too. Analysts at Edelweiss expect price hikes of Rs 5-15 a bag in most of the regions. Higher realisations should also negate the increase in transportation cost which otherwise is being negated by softening in international coal prices and rupee appreciation.
Royalty impact for ACC, Ambuja
A concern for ACC and Ambuja comes from speculation that the duo will have to pay two% royalty to their parent, Holcim in lieu of technology sharing, against 0.5% currently. While no confirmation has come on the same, analyst at Bank of America-Merrill Lynch observe that in many markets across Asia, Holcim’s subsidiaries pay around 1-1.2% of net sales as technical fees and an additional 0.7% of net sales as fee for using Holcim trademark. In case they have to pay higher royalty, their earnings will be impacted by 9-19% observed Rakesh Arora at Macquarie. Investors will thereby have to be watchful on this front.
UltraTech
Meanwhile, with grey cement realisations per tonne at Rs 4,203 (up 20% year-on-year and 2% sequentially) and cement volumes stable, UltraTech saw good revenue, and profitability growth in September 2012 quarter. With largest capacity of 52 million tonnes per annum (MTPA), the company is continuing with further expansions. It plans to enhance production capacity by 10.2 MTPA by early FY14. Analysts at Religare believe UltraTech would be a major beneficiary of an expected pick-up in cement volumes in the next 2‒3 years. Aided by healthy realisations, its performance too is likely to remain strong in the coming quarters.
Ravi Sodah at Elara Capital observes that at current prices UltraTech is trading at (Enterprise Value) $164/tonne on FY14 capacity. The stock is still trading at 12% discount to Ambuja ($185/tonne) despite strong volume growth visibility for next few years. Hence, Sodah has ‘Accumulate” rating for the stock. In this backdrop and better outlook, most analysts have raised their target prices (post results) for the stock (at Rs 2,022) to Rs 2,200 plus.
Ambuja Cements
Ambuja being a regional player has benefitted, having negligible exposure to weak Southern markets. While cement volumes were flat, average per bag prices in the North, Central and West India stood between Rs 286-Rs 297 during the September 2012 quarter (up 19-25% year-on-year and 3-6% sequentially). Thus, Ambuja’s realisations at Rs 4,529 a tonne increased 20.6% year-on-year. Moving forward, too, Ambuja’s favourable market mix, well-diversified fuel mix and efficient operations, should translate into above average profitability for the company, observe analysts at Motilal Oswal Securities. The improving outlook for the sector should help deliver healthy performance going ahead too. However, post the recent outperformance, the stock is trading at a premium to historical average valuations as well as peers. And given the royalty issue, these could limit further upsides in the near-term.
ACC
Even though cement sales volumes in September quarter were expected to remain subdued compared to the June 2012 quarter, ACC negatively surprised the Street with volumes falling five% year-on-year. Analysts owe this to capacity constraints as its latest capacity expansions were in South India which is seeing mixed fortunes.
While ACC, too, should benefit from healthy demand and improving realisations, one needs to monitor the trend in Southern markets. With last capacity additions completed in South, any demand improvement there should translate to improving performance by ACC. For now, ACC is concentrating on capacity additions in the high growth Eastern markets. The benefits of capacity expansion (taking total capacity to 34 MTPA plus by CY13-end) may, however, accrue sometime later.
Overall, analysts remain ‘Neutral’ on the stock. At Rs 1,420, analysts at Elara say ACC is trading at an EV of $141/tonne based on its CY13 capacities. While it is trading at substantial discount to Ambuja and UltraTech, there is scope for some upside for the stock if the royalty overhang subsides.