Morgan Stanley expects cement prices in the country to decline by 12-15 per cent by 2009-10 - after five successive years of a rise - due to significant supply addition pushing industry-wide capacity utilisation to below 80 per cent from nearly 100 per cent at present.
Currently, the pan-India average cement price is about Rs 230 per bag (50 kg).
“We believe that conditions will reverse with the situation similar to that in 2001-02 when utilisation, at 79 per cent, was at a trough and cement companies were not making money,” the brokerage said in a report.
As a result of sliding cement prices, the brokerage sees return on equity of all companies under its coverage – ACC, Ambuja Cements, Grasim Industries and UltraTech Cement – declining below the cost of capital in 2009-10.
It expects effective capacity of the industry to be at 221 million tonne by March and 262 million tonne in 2009-10. Capacity growth in 2008-09 and 2009-10 is expected at 24.3 per cent and 18.8 per cent, respectively, against 7.3 per cent in 2006-07. Despite 14-24 per cent fall in cement shares in the last three months, the brokerage expects further fall on account of multiple negatives leading to lower earnings and keeping stock performance in check.
Rise in cost pressures evident so far in 2008-09 is expected to continue and coupled with government intervention on pricing front, is a major negative for the industry, the report said.
Morgan Stanley is cautious on the sector with underweight rating on shares of ACC, Ambuja Cements and UltraTech Cement. Grasim Industries features under its equal-weight list due to the company’s diversified nature and higher cement growth volume.
“Valuation multiples have come off recently, but we believe the stocks will still trade at or below their long-term averages, given the imminent decline in earnings,” Morgan Stanley said.
It advised investors not to own pure cement stocks as they lack positive catalysts and the negatives are prominent. Morgan Stanley has recommended price target of Rs 527 for ACC, Rs 68 for Ambuja Cements, Rs 1,919 for Grasim Industries, and Rs 533 for UltraTech Cement.
