Cement consumption expected to grow by 10%: P Lilladher

Prabhudas Lilladher results preview on cement sector:

All India cement consumption is expected to grow by 10% to ~58m tonnes in the quarter, primarily on the back of small base of ~1% growth last year and strong demand momentum in the Western and Eastern regions.

Thanks to continued buoyancy in demand from housing, industrial and infrastructure sector, Western region’s consumption is expected to grow by 12% YoY for the quarter, partially benefitted by low base with growth of 4%. On similar lines, consumption in the Eastern region grew by 10% on the back of strong demand in major cement consuming states of West Bengal and Bihar. Northern region’s consumption grew by 11% in the quarter, aided by low base with -0.4% growth and strong demand in Punjab and Rajasthan. Southern region demand witnessed a 10% YoY growth, thanks to negative base of 6% and firm demand in Tamil Nadu. Consumption growth slowed down in the Central region owing to slow awarding of infrastructure projects in UP under the newly formed government.

Thanks to strong discipline, all India average cement price rose by ~6% or Rs18- 20/bag QoQ to Rs313 during the quarter. Eastern and Central region witnessed the highest price increase to the tune of ~Rs40 and Rs25/bag during the quarter with an average price of Rs355 and Rs290, respectively. Prices rose by Rs20 and Rs5 per bag in Maharashtra and Gujarat, respectively, with an average retail price of Rs300-310 (top players) despite high prices in the prior quarter. Prices in the Northern region rose by Rs10/bag with an average price level of Rs300 for the quarter. Prices remained strong in the Southern region, except AP, which witnessed price cut of Rs10 during the quarter.

We have been structurally positive on the earnings quality of the sector, driven by maturity demonstrated by the manufacturers. However, we remain uncomfortable on the valuations of top-3 players, UltraTech Cement (UTCEM), ACC and Ambuja Cement (ACEM) which are trading at EV/EBITDA of 8x and P/E of 15x FY14E, significantly ahead of historical EV/EBITDA of 7.5x and P/E of 13x. Hence, we continue to maintain a negative stance on all the top-3 players. 

(Rs million)