Prefer ACC, Shree Cements from cement space: Emkay

34606 Investors following ACC. Share this News with them.

0

Like this story, share it with millions of investors on M3

Prefer ACC, Shree Cements from cement space: Emkay

Emkay Global Financial Services has come out with its report on cement sector. The research firm is neutral on the sector and prefers ACC and Shree Cements (SRCM) from the space.

Post your opinion here

 

0

Tweet

Share on Tumblr

RELATED NEWS 16 stocks you should buy in falling market: PINC Buy TCS; target of Rs 1328: Firstcall Research Buy Godrej Industries; target of Rs 212: IIFL ACC BSE | NSE 29/05/12 Are Mutual Funds betting on ACC? Other Stocks in this news Shree Cements |

Emkay Global Financial Services has come out with its report on cement sector. The research firm is neutral on the sector and prefers ACC and Shree Cements (SRCM) from the space.

• North, Central and East see softening in cement prices by Rs5-15/bag in absence of usual December uptick in cement offtake. Prices hikes in Gujurat fuelled by better demand
• Despite the political issues and monsoons dragging cement offtake in the Tamil Nadu region, cement prices in southern region hold fort
• Cost push likely to continue in Dec-11 quarter led by 1. Higher e-auction coal prices (as CIL's E auction coal was diverted to power companies in Oct) 2. Imported coal prices going up led by Rupee depreciation 3. Hike in surcharges by railways
• Dec-11 clearly suggests volatility in prices trend ahead- Solid demand pick up remains a key trigger to sustain the recent price uptick. Remain sector NEUTRAL. Prefer ACC & SRCM

Northern Region: Prices come under pressure due to lower than expected demand uptick

• Northern region witnessed corrections of Rs 5-10/ bag in absence of usual December uptick in cement offtake. However certain pockets like Chandigarh continued to witness better growth and saw prices inching up slightly.

• Meanwhile, producers are pumping the channels with supplies in a bid to meet their year end targets which is evident from the higher inventory levels in the system. This is additionally exerting some pressure on the prices. Also with the advent of winter season (which usually impacts construction activity in late December & January because of extreme temperatures) we expect sluggish prices trend till mid January.

Eastern region: No major uptick in cement demand affects prices

• Eastern region where prices had skyrocketed and reached YTD highs in the previous month saw a correction of Rs5-8/bag as demand pickup in the region still has not improved as expected

• We had highlighted in our previous note, that, post the price hikes of Rs20-25/bag which were taken in the month of November and almost reached YTD highs, we didn't see any room for prices to go up further. And with the demand remaining at the same levels as last month there were no triggers to sustain the high levels.

Central Region: Lackluster demand continues

• Demand in the region remains at almost the same level as last month putting pressure on cement prices which have taken a hit of Rs10-15/bag.

• Price increases in anticipation of demand pick up and constrained supplies have not sustained and with inventory levels high due to more supplies from cement producers, price levels are expected to remain under pressure till any meaningful uptick in cement demand is seen in the month of January.

Western region: Hikes in Gujarat increases average western price levels

• Western region average prices inched up a little as Gujarat saw price hikes (Rs 5-10 /bag) fuelled by better demand momentum.

• We expect prices to remain stable till January before any further improvement in demand could happen that could trigger the upward movement.

Outlook - demand momentum remain key to sustain recent price uptick

In the absence of healthy demand growth, All India cement price averages remained flat mom with North, central and Eastern regions witnessing price declines, while western region was the only one where average prices have improved (backed by hikes in Gujarat). Prices in southern region remained flat despite the continuing political scenario and monsoons disrupting offtake of cement. On the profitability front, the recent prices hikes (Sept-Oct-11) has meant that cement producers that faced extreme cost pressures in Q2FY12, will see their margins improving in Q3FY12E. Though we expect the cost push to moderate over the next 2-3 quarters (by Q1-Q2FY13), in the Dec-quarter (Q3FY12) we expect costs pressures to remain high led by 1. Higher e-auction coal prices (as E auction coal was diverted to power companies in October) 2. Imported coal prices going up led by INR depreciation against USD 3. Hike in surcharges by railways in Oct-11.

Cement dispatches in November grew by 29% yoy (twelve month rolling average growth at 4.6%) much as expected due to low base of last year (as North was impacted by floods and festive season vs October festive season this year). However the trend doesn't seem to strong as the MoM numbers were disappointing with majors like ACC and Ultratech posting mom declines. The low base effect of FY11 might continue to help growth numbers seem better till January 2012. However for a sustainable pricing power, the industry needs the cement demand to pick up. We believe that aggregate demand momentum is yet to pick as the private capex investments remain sluggish & infra spending at standstill. We are yet to see structural demand drivers in place for a solid demand pick which remains a key trigger to sustain cement prices. We maintain neutral stance on the sector. Prefer ACC (volume growth to help drive operating leverage and protect margins), and Shree cements amongst mid caps (at 25% discount to ACC valuation, cement biz alone yields value of Rs 2200/share implying negative value for power biz).

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