Cement companies to post healthy growth in Q4: Emkay

However prices rose all across in the month of March triggered by railway freight hike announcement and the change in excise duty structure in the budget. This has led to quarter averages for cement prices rise 6% yoy and 3% qoq on All India basis to Rs275/bag. 

We expect realizations for cement companies under our coverage to be at Rs 4366/t, a growth of 11% yoy while topline is expected to post  growth of 19.3% yoy. 

International coal prices declined 13% yoy while USD appreciated by 1.8%qoq which resulted in landed price of international coal  declining 4% yoy. Further customs duty on coal was also brought down in the budget. However cost pressures in the Q4FY12 are  expected to remain high led by 1. New (GCV based) coal pricing mechanism adopted by Coal India ( in January) which is effectively a  price hike of 28% on coal for cement sector 2. Hike of 23% in base freight by railways from 6th March, 2012 impacting both P&F (+5.6%  qoq) and Freight costs (+4% qoq). Further the change in excise duty structure is expected to have a negative impact of Rs3-4/bag.

We  expect the full impact of freight hike and change in excise duty structure to be visible in the coming quarters. In the current quarter  however we expect EBDITA to grow 9.9% yoy, with EBIDTA/t at Rs950 (+3.9% yoy and 6.7% qoq) led by better realizations and volumes. 

Though the demand growth in this quarter was encouraging, we remain concerned on the continuity of this trend as it is the single most important factor to sustain prices which are already at elevated levels. The twelve month rolling average growth still stands at 6.5% till February’12 which justifies our concern over demand. 

We maintain neutral stance on the sector. Given the recent run up in stock prices, these rich valuations for companies (average EV/EBITDA at 9X and EV/tonne of USD 135 for FY13 numbers) fully captures positives leaving little upside from current levels. Remain negative on ACEM & UTCEM. Prefer ACC & Shree cements.

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