Cement: Unusual December, price decline continues

Emkay Global Financial Services has come out with its report on cement sector. According to the research firm, one can prefer ACC in cement space.

• All India prices at Rs275/bag, -3.4% mom- subdued post Diwali offtake see cement prices softening again. Weaker than estimated demand scenario results in a steeper fall
• Eastern (-6.4% mom) and Central regions (-5.9% mom) witness steep decline. North (-4.9% mom) and West (-4.5%mom) also see softening trend. Prices in South remain flat except 8% mom decline in Andhra Pradesh (AP)
• Dealers expect demand to improve post mid Jan. However Q313 EBITDA growth could slip to low teens led by low realizations(~10% qoq decline in EBIDTA/t to Rs900) 
• Prefer ACC as steep valuations leave little room for further out-performance for Ambuja Cement & Ultratech. Remain positive on Grasim, Madras Cements & Shree Cements

An unusual December, subdued Offtake see cement prices softening again- After an unusually low seasonal price decline in Q2FY13, Cement sector is set to witness another quarter of unusual price trend in Q3FY13. Our Channel check in Dec-12 suggests that cement prices across India have softened led by poor post Diwali demand owing to slowdown in construction activities impacting cement offtake. The offtake is has also been impacted by onset of Rabi sowing impacting labour availability while some regions also are witnessing negative impact of sand mining ban (Particularly Northern region) and low availability of other construction materials like bricks. Overall on an All India basis, cement prices at Rs275/bag have corrected by Rs14/bag or 4.7% mom. Dealers expect the demand to improve from mid Jan when the peak construction season kicks in.

All India prices down 4.7% mom -Eastern region witness sharpest decline-  After a soft price trend witnessed in Nov-12, this is the second consecutive month where cement offtake has been weaker than expected resulting in a steep fall in cement prices across regions. The sharpest decline has been witnessed in the East (-6.4% mom) followed by Central (-5.9% mom), North (-4.9% mom) and West (-4.5% mom). On the other hand, prices in the South have largely remained stable except for AP where 8% mom fall has resulted in a regional decline of 1.9% in southern cement price averages.

Sand mining issues continue to haunt North and Central regions-  Both the Northern and Central region seems to be plagued by the issue of sand and brick availability led by the sand mining restriction remaining partially resolved. Though the mining ban has been lifted for some states like Chandigarh and Punjab, the auction process is still pending impacting the supply of sand and bricks.Central region too faces similar issue and has witnessed steep price cuts over the last one month.

Prefer ACC. Remain positive on Grasim, Shree cements & Madras cements- Prefer ACC as current high valuations for companies in the sector have left little room for further outperformance for stocks like UTCEM and Ambuja(ACC’s valuation at 8.4X EV/E, USD 138 EV/T, provides reasonable comfort compared to expensive valuation for Ambuja EV/E 9X & EV/T USD 174, Ultratech- EV/E 9.6 X, EV/T –USD165). We remain positive on Grasim (led by structural change in VSF business and improved performance from cement division) amongst large caps while in mid caps we prefer Shree Cements (attractive valuations) and Madras Cements (robust volume growth, low energy cost inflation and accelerated debt repayment to help stock outperformance).

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