Anand Rathi positive on cement space in long run
Anand Rathi has come out with its report on cement sector. According to research firm, there can be short term pressure on the sector citing the seasonality of the business, but from the beginning of October improvement is expected in demand and prices.
September 05, 2012 / 14:44 IST
Anand Rathi has come out with its report on cement sector. According to research firm, there can be short term pressure on the sector citing the seasonality of the business, but from the beginning of October improvement is expected in demand and prices.
All-India cement dispatch grew 6.9% in FY12 to ~225 million tones (MT) vs 5.1% and 10.5% growth in FY11 and FY10 respectively. The capacity utilization was at 76% in FY12 (same as in FY11) and 84% in FY10. Cement prices have been increasing from the beginning of April 2009, barring season fluctuation. Eastern region has seen the highest price increase followed by North and West region. Factors impacting the price increase vary from region to region. The major determinants of price hike are pass through of higher input costs like coal, freight, diesel and other raw materials. Some other important factors for price volatility include, change in duty/tax structure, delayed monsoon causing increase in demand, plant shutdowns, depreciating rupee, shortage of sand. So does this price hike in cement justify for the increase in construction cost of the projects? Cement contributes 6-13% of the construction cost depending on the type of the project. This cost is significantly lower than other components like steel & labour, which impact the overall construction cost the most. Cement prices in the last 4-5 years have risen lower than the inflation. So the answer is that apart from cement there are many other factors that impact the construction cost of projects. Also these price hikes are very much passable as this commodity has no substitute and is price inelastic. Therefore, the price hike on the overall cost of construction of the project due to increase in cement price is negligible and can be easily passed on to the final consumer.In response to the CCI order of penalties on the cement companies, the companies have now appealed to COMPACT and we believe, this will take time to actually get executed as other such cases are still pending since a couple of years. But we feel the overhang of this issue is gone and it will take around 1-2 years for actual implementation of the order and if implied then it would be a one time hit to the companies. At present the companies have not provided for the same. So therefore we will wait for the final outcome.Going forward we believe, FY13 we see 8% growth in the volume and 4-5% growth in the prices. Though there can be short term pressure on the sector citing the seasonality of the business, but from the beginning of October we expect improvement in demand and prices. We are positive on the sector in longer run. In India, currently, there are over 40 players in operations but close to half of the market is controlled by majors like Aditya Birla group's UltraTech, Holcim's ACC and Ambuja Cements, Jaiprakash Associates (diversified), India Cements and Shree Cement. The share prices of these companies have also performed well for sometime now.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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