Cement pricing continues to remain weak in March 13: Emkay
Emkay Global Financial Services has come out with its report on cement sector. The research firm remain negative on ACC while retains hold rating on Ambuja Cements & UltraTech Cement. Remains positive on Grasim Industries led by expected bottoming out in VSF business profitability.
April 02, 2013 / 13:22 IST
Emkay Global Financial Services has come out with its report on cement sector. The research firm remain negative on ACC while retains hold rating on Ambuja Cements & UltraTech Cement. Remains positive on Grasim Industries led by expected bottoming out in VSF business profitability. In mid caps one can prefer Madras Cements & Shree Cement. Expect weak demand scenario to result in a 5.3 percent growth in cement dispatches for FY13 said Emkay.
All India prices at Rs 294/bag declined by ~Rs 4/bag or -1.3 percent mom in March. Sharp decline seen in south (-3.2 percent mom) & central region (-2.8 percent mom) followed by east (-1 percent mom)Cement demand remains extremely weak. Estimate cement dispatches to have grown of 2.5-3 percent yoy in Q4FY13 against a healthy 9 percent growth seen in Q4FY12. FY13 demand growth ~5 percentWeak offtake restricting manufacturers to extend H1FY13 pricing power. H2FY13 cement prices +6 percent yoy as compared to +16 percent yoy in H1FY13. Muted volumes to mean mid single digit topline growth for cement companiesHigher freight cost to mean yoy decline in EBIDTA/t. Cut earnings by 2-8 percent led by lower exit prices for FY13 & Lower Volumes. Retain Reduce on ACC & Hold rating on Ambuja & Ultratech. Remain positive on Grasim, Madras & ShreeWeak demand continues to impact pricing - prices down 1.3 percent m-o-mOur Mar-13 pan India dealer survey points out to continued weakness in cement offtake impacting pricing power as all India cement prices declined by ~Rs4/bag or -1.3 percent mom in Mar-13, which usually is seasonally strong month. Led by subdued offtake sharp decline was witnessed in south (-3.2 percentmom) followed by central (-2.8 percent mom) & eastern (-1 percent mom).Lower FY13 exit prices and weak demand drive earnings downgrade
FY13 has been rather unusual in terms of price movement with positive upswings witnessed in Q2 while Q3/Q4 being a complete washout as weak offtake has been unable to support the prices. H2FY13 cement prices increased +6 percent yoy as compared to +16 percent yoy in H1FY13. Led by curtailed Government spending continuing to hamper infrastructure projects & slower execution by private developers, we estimate cement dispatches to have grown by 2.5-3 percent. We notice that cement prices rose ~ 13 percent in the last construction season i.e. from start of Oct-11 to end of March-12. This sharp price trend was ideally supported by a solid 8.7 percent yoy demand growth that the industry saw in the similar period. In the backdrop of poor demand we see the industry finding it difficult to exercise its pricing power. Lower exit prices for FY13 coupled with the weak industry dynamics have led to downward revision in our earnings estimates for companies under our coverage.Weak offtake continue to restrict pricing power, all India prices down Rs4/bag or 1.3 percent m-o-mOur pan India dealer survey points out to continued weakness in cement offtake which in severely restricting pricing power of cement manufacturers as cement prices declined by ~Rs4/bag or -1.3 percent mom in March. The highest decline was witnessed in the southern region (-3.2 percent mom) followed by central (-2.8 percent mom) & eastern (-1 percent mom) mainly led by subdued demand in the system.The sand mining issues continue in the northern and central part of the country hampering construction activities. Further the festive season (Holi) is expected to create labor shortage which would further impact the momentum in construction activities. This in turn has lead to cement prices remaining largely flat sequentially. The highest decline was witnessed in the southern region (-3.2 percent mom) followed by central (-2.8 percent mom) & astern (-1 percent mom) mainly led by subdued demand in the system. Prices in the northern and western regions remain flattish with pockets like Rajasthan (North), Pune and Surat (West) witnessing declines of ~2-3 percent mom, while prices in other pockets remained almost flattish. Nagpur (West) and Chandigarh (North) were the only exceptions where prices have moved upwards. While price hikes in Chandigarh were driven by slight demand pick up (as the sand mining and brick availability issues were addressed), prices in Nagpur have spiked up due to supply constraints led by shutdown of Ultratech's Awarpur plant.FY13 demand growth at just 5 percent
Current cement demand remains extremely weak which is clearly illustrated by the poor cement offtake (Shree cement Feb-13 Adj dispatch growth -15 percent yoy, Ultratech @ -4.5 percent yoy). Led by curtailed Government spending continuing to hamper infrastructure projects & slower execution by private developers, we estimate cement dispatches to have growth by 2.5-3 percent yoy in the quarter ending March-13 which is in complete contrast to a healthy 9 percent growth witnessed in same quarter last year. We expect this weak demand scenario to result in a 5.3 percent growth in cement dispatches for FY13.Lower FY13 exit prices and weak industry dynamics lead to earnings downgradeThe current financial year has been rather unusual in terms of price movement with positive upswings witnessed in Q2 while Q4 being a complete washout as compared to the historical trend. H2FY13 cement prices increased +6 percent yoy as compared to +16 percent yoy in H1FY13.Cement prices had witnessed their peaks in Q2FY13, post which the decline in offtake has been unable to support the prices and despite production discipline prices have just been on a downward trend. We notice that cement prices rose ~ 13 percent in the last construction season i.e. from start of Oct-11 to end of March-12. This sharp price trend was ideally supported by a solid 8.7 percent demand growth that the industry saw in the similar period. With March-13 demand growth being just ~3 percent we see the industry finding it difficult to exercise its pricing power. Lower exit prices for FY13 coupled with the weak industry dynamics (expected demand growth in FY14 ~7.5 percent) have led to downward revision in our earnings estimates for companies under our coverage.We remain negative on ACC while retain our HOLD rating on Ambuja & Ultratech. We remain positive on Grasim (led by expected bottoming out in VSF business profitability. In mid caps we prefer Madras Cements (robust volume growth, low energy cost inflation and accelerated debt repayment to help stock outperformance) & Shree Cement (though near term earnings would remain weak for Shree led by lower volume & subdued pricing in Northern & Central Region)," says Emkay Global Financial Services research report.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. 
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