Excess supply to hurt cement players this yr: Angel Broking

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Excess supply to hurt cement players this yr: Angel Broking

Brokerage firm Angel Broking feels the current fiscal will be a tough year for the cement sector. In an interview with CNBC-TV18's Latha Venkatesh and Anuj Singhal, Rupesh Sankhe, Cement Analyst, Angel Broking said excess supply is going to hurt cement players badly in FY11.

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Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Brokerage firm Angel Broking feels the current fiscal will be a tough year for the cement sector. In an interview with CNBC-TV18's Latha Venkatesh and Anuj Singhal, Rupesh Sankhe, Cement Analyst, Angel Broking said excess supply is going to hurt cement players badly in FY11. The current quarter i.e. Q2 will be the worst for the industry," he said.

Below is a verbatim transcript. Also watch the accompanying video.

Q: Is the industry's excess capacity over demand bottoming out anytime soon or do you think it will be belabouring under excess capacity for perhaps all of this financial year?

A: We believe FY11 year is going to be very bad for the cement industry players because of excess supply. If you look at the utilisation level, it is close to 67% and if you look at the first four months of FY11, industry grew by just 6% as against 11% last year.

So there is pressure on the realisation front, as the industry does not have the pricing power. If you look at the cost pressures, they are going up in terms of higher fuel prices and freight costs. So we believe Q2 is going to be the worst for the cement industry players and players who are focused on the south market especially in the Andhra Pradesh below Rs 500 EBITDA per tonne will start reporting the process.

Q: How will you pick stocks at all and when will you pick them? Would it be post the Q2 results-good opportunity to start looking for some attractive pieces over here and what according to you is attractive in terms of valuation?

A: If you look at last three-four months cement sector has underperformed because of negative newsflows in terms of lower utilisation rate, lower realisation and pressure on the volume front. But we believe Q2 because of sentiment will remain negative on the stocks because of bad numbers that is expected to out in the next one-two months.

But if you look at the valuations, largecap players like ACC and Ambuja is trading at close to USD 140 EV per tonne and close to eight times EV EBITDA. So it seems to be fairly valued based on FY12 numbers.

But in the largecap UltraTech is available at close to USD 95 EV per tonne and close to 6 times EV EIBTDA and when Samruddhi Cement will get merged with UltraTech the valuation will be inline with ACC and Ambuja.

We like UltraTech at current valuations. Among the midcap players, JK Lakshmi Cement is available at close to USD 39 EV per tonne. So purely from asset replacement perspective we are positive on midcap stocks. One can enter these stocks with a one year time horizon.

Disclosure:

I do not hold any stocks.