Cement price hike not justified, foresee correction: Expert

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Cement price hike not justified, foresee correction: Expert

Cement prices saw an upward move on the back of reports stating there was a price hike which took place in South India. The buzz of reports was confirmed by Rupesh Sankhe, Cement Analyst at Angel Stock Broking who said the range of increase in the South was around Rs 30-45.

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Cement prices saw an upward move on the back of reports stating there was a price hike which took place in South India. The buzz of reports was confirmed by Rupesh Sankhe, Cement Analyst at Angel Stock Broking who said the range of increase in the South was around Rs 30-45. He was uncertain if the prices would be able to sustain themselves at those levels.

"A Rs 30-45 price hike is not fundamentally justified given the supply situation in south market. At 50% utilization, we believe this price hike is not sustainable and that price correction is there on the cards," he explained.

Below is a verbatim transcript of his interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.

Q: Could you get any confirmation of this price increase from any of the southern cement companies and does that change your outlook on that space?

A: Yes, cement prices have increased by almost Rs 30-45 in southern markets but we believe it is not a demandful price hike. Few players, who were selling cement at the cost of production, are trying to minimize their losses. It is more of players trying to bring more of a pricing as well as production discipline.

Based on our analysis, India Cement below Rs 400 per tonne earnings before interest, tax, depreciation and amortization (EBITDA) will start making losses and Madras Cement at Rs 600 EBITDA per tonne will start making losses. So that is the reason.

Q: At the moment would you therefore not have a buy on any of these companies?

A: We believe the cement price increase-today's price is not sustainable. We believe there will be an Rs 10-15 price correction in the next 10-15 days. We believe the utilization, which is currently at 50% in South and because of it, the price realization pressure will continue. The other focused players will start reporting losses in the second quarter.

So sentiment will remain negative for the south based player and it will take time to absorb all this incremental capacity. But looking at valuations, some of the players like India Cement or Madras Cement , India Cement is available at USD 70 enterprise value (EV) per tonne and if we adjust for the inflation and the 1998-2001 level EV per tonne, it is still fairly discount to its replacement cost. We see the downside capped at 5-10% from the current level and we have buy rating on India Cement with a target price of Rs 139 with a one year time horizon.

Q: You anticipate a price cut would be undertaken by the same players in a few more days of about Rs 15?

A: That is what we are expecting because Rs 30-45 price hike is not fundamentally justified given the supply situation in south market. At 50% utilization, we believe this price hike is not sustainable and that price correction is there on the cards.

Q: You were talking about India Cement but what about the other south players, which have run up something like a Madras Cement or Dalmia Cement . Would you recommend selling into the rally, what is the outlook on those counters?

A: All these south based players have now realized that they are making losses and they are selling at the cost of production. We believe all this negative is there already in the valuation and Madras Cement is also available at close to USD 65 EV per tonne. So we also have buy recommendation on Madras Cement with a target price of Rs 139.

Q: Any other cement companies in other regions that you like?

A: If you look at north based cement companies, JK Lakshmi Cement which is available at close to USD 42 EV per tonne is a significant discount to other players like JK Cement, Shree Cement or Birla Corporation in the same region. If you look at the quality of asset, it is also better for JK Lakshmi Cement and we are expecting the 36 megawatt captive power plant which will come in FY11 which will improve their margins. We see that valuation gap which is currently with other companies in the north base. There are chances of JK Lakshmi Cement rerating from the current levels.

Q: Any disclosures?

A: I have no position.