Angel Broking has come out with its results estimates on cement sector for March FY12. The research firm expects that their cement universe to report an 18.4% yoy improvement in its top line on account of 6.1% growth in dispatches and a substantial improvement in realization. However, companies continue to face cost pressures due to higher coal and freight cost, which is expected to result in margin decline for some of the players.
We remain concerned on the cement sector on account of low capacity utilization, which is due to modest demand growth and significantly excess capacity. In our view, the cement sector's valuations in terms of EV/sales and EV/tonne when compared to utilization levels are almost 41% more expensive than historical valuations during periods of similar utilization levels. However, production discipline among cement companies has helped healthy pricing and has led to high valuations currently. Nevertheless, in our view, this is a thin investment thesis to rely on, as there is a 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$44 on FY2014E capacity.| Company | Net Sales | % chg | Net Profit | % chg |
| 4QFY12E | 4QFY12E | |||
| ACC^ | 2,826 | 17.8 | 376 | 7.2 |
| Ambuja^ | 2,643 | 19.7 | 457 | 12 |
| India Cements | 1,109 | 11.1 | 70 | 27.5 |
| JKLakshmi | 439 | 5.9 | 43 | 33.9 |
| Madras Cement | 902 | 31.4 | 106 | 65.8 |
| Shree Cement | 1,424 | 33.1 | 79 | 20.1 |
| UltraTech | 5,176 | 15.3 | 551 | -24.1 |
| Note : ^December year ending |
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