Cement sector results preview for Q3FY12: Angel

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Cement sector results preview for Q3FY12: Angel

Angel Broking has come with its December quarterly earning estimates for cement sector.

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Angel Broking has come with its December quarterly earning estimates for cement sector. The research firm expects, the cement sector's valuations in terms of EV/sales and EV/tonne when compared to utilization levels are almost 23% more expensive than historical valuations during periods of similar utilization levels.

Angel Broking's quarterly earning estiamtes on cement sector:

Higher coal prices to exert margin pressures in this quarter Cement companies are expected to face margin pressures due to higher yoy power and fuel costs due to increased domestic and international coal prices and INR depreciation. During March 2011, Coal India hiked the price of coal supplied by it to non-core sectors by ~30%. Average prices of the New Castle Mckloksey 6,700kc coal were higher by 6.2% on a yoy basis. However, on a sequential basis, average coal prices in USD terms were down by 5.3%, but ~11% qoq depreciation in average INR/USD rates, negated the fall and average coal prices in INR terms were higher by 4.5% on a qoq basis. 

3QFY2012 expectations - Healthy top-line growth; but cost pressures to be felt We expect all the cement companies under our coverage to report top-line growth of 11-39% yoy, primarily on account of substantial improvement in realization and higher dispatches. Amongst the pure cement players under our coverage, Ambuja Cements is expected to post the highest top-line growth of 23.2%, aided by13.7% improvement in realization and 8.4% growth in dispatches. Shree Cements is expected to post the highest top-line growth of 38.8%, aided by higher cement dispatches and higher revenue from the power division. However, cement manufacturers are expected to face cost pressures on account of higher coal and freight costs. We expect Shree Cements to post the highest margin expansion amongst our coverage stocks. 

Outlook and valuation: In our view, the cement sector's valuations in terms of EV/sales and EV/tonne when compared to utilization levels are almost 23% more expensive than historical valuations during periods of similar utilization levels. But, despite this, cement companies have maintained relatively healthy pricing due to production discipline amongst them, which has led to high valuations currently. However, in our view, this is a thin investment thesis to rely on, as there exists persistent risk of a breakdown in production discipline. Hence, we remain Neutral on the sector. That said, we maintain our Buy recommendation on JK Lakshmi due to its attractive valuations as it is trading at EV/tonne of US$36 on current capacity.