Motilal Oswal has come out with its earnings estimates on cement sector for December quarter FY13. The research firm expects moderate growth in cement demand in 3QFY13, impacted by a delayed festive season and continued sluggishness in housing and infrastructure.
Delayed festivities lead to moderate dispatch growth; utilization stable YoY: We expect moderate growth in cement demand in 3QFY13, impacted by a delayed festive season and continued sluggishness in housing and infrastructure. We estimate growth of 5.5% YoY (~10% QoQ). However, capacity utilization would be stable YoY (up 5pp QoQ) at 74%. We expect demand recovery to resume from January 2013, with volume growth of 7.9% for the industry in FY13, translating into capacity utilization of 75% v/s 74% in FY12. 9MFY13 volume growth of ~6.9% YoY implies residual growth of 10.4% for 4QFY13. Prices under pressure QoQ - unusual for 3Q; expect strong recovery in 4QFY13: Delayed festive season followed by an early marriage season impacted demand, and more importantly, cement prices. Cement prices were unusually weak in 3QFY13, with national average retail prices down by ~INR10/bag QoQ (down ~INR5/bag YoY, adjusted for excise duty increase in February 2012). Prices are (1) broadly stable QoQ in the South (except in Andhra Pradesh, where prices are volatile and down ~INR5/bag QoQ), (2) down INR7/INR10/bag in Central/East India, and (3) down INR13-14/bag in North and West India. We factor in ~INR20/bag improvement in FY13 realizations over the FY12 average, which is ~INR7/bag higher than 3QFY13 average pricing. We factor in INR15/INR12/bag higher realizations in FY14/FY15. Weak pricing, higher freight cost to result in QoQ decline in profitability: The QoQ drop in realizations coupled with full impact of diesel price hike on freight (QoQ increase of INR4-6/bag) would drive down EBITDA to INR786/ton (down INR223/ton QoQ, INR50/ton YoY). The impact of lower prices and higher freight is partly diluted by soft imported coal prices (~4% QoQ decline) and operating leverage (~5.5% YoY, 10% QoQ volume growth). For FY13, we estimate just ~INR122/ton improvement in EBITDA to INR1,019/ton against INR400/ton improvement in realizations, diluted by cost push. However, we believe that cost push is moderating and expect improvement of ~INR165/ton in EBITDA/ton on the back of INR300/ton improvement in realizations. Valuation and view: The worst is behind and we expect gradual improvement in operating performance. Though the sector would continue to be plagued by overcapacity, there would be gradual and consistent improvement in capacity utilization, driven by sustained volume recovery and slowing capacity addition. As a result, we expect strong pricing, with ~INR15/INR12/bag increase in cement prices in FY14/FY15. This coupled with cost stabilization, albeit at higher levels, would drive improvement Expected quarterly performance (Rs Mn)| Company | Sales | Profit | ||||
| Dec '12 | % YoY | % QoQ | Dec '12 | % YoY | % QoQ | |
| ACC | 26,091 | 4.3 | 6.7 | 1,885 | -2.6 | -24.2 |
| Ambuja Cements | 25,143 | 7.6 | 16 | 3,110 | -5.8 | -7.8 |
| Birla Corporation | 5,900 | 24.2 | -6 | 295 | -32.5 | -63.2 |
| Grasim Industries | 11,555 | -7 | -13.4 | 2,020 | -26.4 | -47.2 |
| India Cements | 9,850 | 4.6 | -12.3 | 130 | -76.9 | -73.5 |
| Jaiprakash Associates | 37,922 | 14.7 | 27.1 | 1,228 | -39.6 | -4.1 |
| Shree Cement | 14,666 | 16.5 | 10.9 | 2,046 | 245.5 | -10.6 |
| Ultratech Cement | 50,053 | 9.6 | 6.5 | 5,009 | -12 | -8.9 |
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