Expects demand for cement to grow by 8% in FY13: Kotak Sec

Kotak Securities has come out with its report on cement space. The research firm expects demand to grow by 8% during FY13 and with slowing pace of capacity additions, capacity utilizations are expected to improve going forward.
 
Cement dealers across regions indicate softening cement prices led by festive season, cyclone, labor unavailability as well as power non-availability.

• However, prices are expected to firm up in coming months from the average price levels of Rs 285 per bag for Nov, 12.
• We expect demand to grow by 8% during FY13 and with slowing pace of capacity additions, capacity utilizations are expected to improve going forward
• Demand supply scenario: Cement demand growth during last two years was impacted by slowdown in infrastructure awards as well as real estate sector. Demand was impacted last month due to festive season. However it is expected to improve going forward due to a) increased demand from rural housing led by healthy monsoons b) revival in infrastructure sector which was impacted by delays in policy making c) recovery in real estate sector led by reversal in interest rate cycle.
• We thus expect demand to grow by 8% and 8.5% during FY13 and FY14 respectively and expect capacity utilizations to improve from 77.3% in FY12 to 80.5% in FY14 and 84% in FY15 for the industry as a whole.

Northern region: Post monsoons, cement prices started recovering in northern market led by expectations of revival in demand from rural and urban housing. During Oct, 12 cement prices witnessed an increase of Rs 10-12 per bag while prices declined by Rs 15-20 per bag during November mainly led by festive season of Diwali and labor shortage. This could also be due to year-end inventory clearance by large players. Prices were expected to increase from 1st Dec by nearly Rs 20 per bag but it has not been passed through yet due to continued problem of labor shortage. Prices are likely to firm up in the coming months with the onset of construction activity post easing off labor issues. Along with this, likely capacity addition in the northern region is expected to come mainly during FY14 now. This is likely to keep utilization levels at higher levels.
 
Southern region: Prices in AP had dipped quite sharply during Sep, 12 with entry of new players like JP Associates and JSW cement. However, recovery was witnessed in a short duration with prices in AP rising by Rs 25-30 per bag from the lows seen during Sep, 12. Prices have remained firm in Kerala due to indefinite strike of cement dealers alleging that the State government was imposing double tax on them. But prices declined by Rs 10-15 per bag in regions like Chennai, Cochin due to disruption in construction activities led by cyclone and power non-availability. Prices in southern region may remain weak till Dec, 12 and is likely to firm up after festive season of Pongal in mid Jan, 2013.
 
Eastern region: Demand and pricing scenario remained mixed in eastern region post Q2FY13. Kolkata witnessed decline of Rs 10-15 per bag in cement prices on account of low demand led by festive season of Durga Puja and Diwali while prices firmed up in regions like Patna, Bhubaneswar by Rs 10-15 per bag. Dealers indicated that prices are expected to improve in the coming months with improvement in demand. Incremental supply is also not expected in the near term in eastern region with capacities of JK Lakshmi Cement and Ultratech Cements likely to come up only during H2FY14.
 
Western region: Cement prices remained stable in some of the western region with marginal declines witnessed in Mumbai and Gujarat due to low demand. However regions like Pune and Nagpur witnessed sharp fall in cement prices. Prices are expected to remain flat in Gujarat due to election schedule and are likely to increase post elections.

We believe that going ahead, cement prices are likely to firm up with revival in the construction activity across various infrastructure and real estate projects and companies would continue to pass on the increased costs to the end users. Along with this, increase in rural demand led by good monsoons as well as pre-election spend in most of the states is also likely to sustain the firm cement pricing scenario.
 
Q2FY13 result analysis: During Q2FY13, average cement realizations for the cement companies witnessed an improvement ranging from 13-19% YoY. This sharp improvement in cement realizations resulted in improving EBITDA per tonne for the cement companies despite cost increases. Realization growth for south based companies was in the range of only 4-5% YoY on account of high base effect. Costs have also moved up during last one year from a range of nearly Rs 3400 per tonne to as high as Rs 3800 per tonne. This has been mainly on account of increase in freight charges led by higher diesel prices, rail freight as well as higher lead distance. Power and fuel costs also continued to remain high due to higher prices of domestic coal along with increase in purchased power tariff. Going ahead also, we expect costs to remain high but companies are confident of passing on any hike in costs to the end users.
 
Recommendation and top picks: We believe that recent decline in cement prices provides a good opportunity to enter cement stocks with attractive valuations. Pace of capacity additions has slowed down and demand is expected to witness an improvement going forward led by housing and infrastructure segment. Thus, capacity utilizations are expected to improve from the current levels going forward. Cement prices are also likely to firm up going forward with companies confident on passing on any cost hike to end users. We thus expect cement companies to benefit from improvement in cement prices and volumes and hence we maintain our positive stance on the sector.

We prefer Grasim Industries among our coverage universe.

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

Read More