Emkay positive on Grasim; retains hold on Ultratech, Ambuja

Emkay Global Financial Services has come out with its report on cement sector. According to the research firm, demand is expected to recover in post 15th January as peak construction season starts. Emaky retained hold on UltraTech Cement & Ambuja Cements and remained positive on Grasim Industries.

• Cement volumes for the current quarter remain subdued as reflected by 1.9% yoy growth (7% qoq) for companies under our coverage
• Poor post Diwali Cement offtake and constrained availability of construction materials (sand & bricks) in Northern and central region impact construction activities
• Unusual cement price trend in 3Q13 – All India prices down 3.6% qoq sharp declines of ~4.5% qoq witnessed in western and northern regions
• Companies under our coverage to post realization growth of 5.8% yoy (-2.5% qoq to Rs4472/t) leading to revenue growth of 8.1% yoy
• Cost/t is expected to increase 1.7% qoq driven by 7% increase in freight costs. However expect the same to be partially negated by 15% yoy decline in international coal prices
• Expect EBITDA/t at Rs870/t +0.9% yoy,-16.6% qoq. EBIDTA is expected to grow 1.2% yoy but decline 11% qoq led by lower realizations. APAT to grow by 5% yoy but decline 15% qoq
• Un-seasonal Dec-12 price decline lead to lower exit price & EBIDTA/t creating downside risk to our CY13E/FY14E estimates
• For every 1% downward revision in cement price assumption for FY14E/CY13E, expect max earnings impact for Ultratech and ACC of ~-5.3%
• Rich valuations for companies in the sector have left little room for further out performance. Retain HOLD on Ultratech & Ambuja. Remain positive on Grasim amongst large caps
• Shree Cements and Madras Cements remain preferred midcaps (strong volume growth and improving cost structure led by better energy efficiencies)

Cement Volume growth remains subdued
Cement demand remained subdued in Q3FY13E owing to slowdown in construction activities in the months of November and December impacting cement offtake. The month of December was rather unusual witnessing lower than expected cement demand as against an expected post diwali boost. The offtake has also been impacted by onset of Rabi sowing impacting labor availability while some regions are also witnessing negative impact of sand mining ban (particularly Northern region) and low availability of other construction materials like bricks. Our estimates for volume growth for companies under our coverage are at +2.1% yoy and 7.4% qoq. This implies a growth of 3.6% yoy for YTDFY13E. We expect demand to recover in post 15th January as peak construction season starts.

Unusual Price trend continues- Cement prices soften in Q3FY13E
After an unusually low seasonal price decline in Q2FY13, cement sector is set to witness another quarter of unusual price trend in Q3FY13. Our Channel check suggests that cement offtake has been weaker than expected resulting in a steep fall in cement prices across regions. The sharpest decline has been witnessed in the West (-4.8% qoq) followed by North (-4.2% qoq), East (-3.5% qoq) and Central (-3.2% qoq). On the other hand, prices in the South have largely fluctuated led by strong swings witnessed in AP cement market where ~7% qoq fall has resulted in a regional decline of 2.1% in southern cement price averages. Overall on an All India basis, cement prices at Rs289/bag have corrected by Rs11/bag or 3.6% qoq (however remains at +8% yoy). Dealers expect the demand to improve from mid Jan when the peak construction season kicks in which is expected to support price hikes.

Rich valuations for companies in the sector have left little room for further out performance. Retain HOLD on Ultratech & Ambuja. We remain positive on Grasim (led by structural change in VSF business and improved performance from cement division) amongst large caps while in mid caps we prefer Shree Cements (attractive valuations) and Madras Cements (robust volume growth, low energy cost inflation and accelerated debt repayment to help stock outperformance).

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