Hold Ambuja, Ultratech, Shree Cements; reduce ACC: Emkay

Emkay Global Financial Services has come out with its report on cement sector. The research firm has remained negative on ACC while retained hold rating on Ambuja Cements & Ultratech Cements and remained positive on Grasim Industries.

• Pricing power remains weak as prices continue to slide even in seasonally strong period. Andhra prices dip to break even levels of Rs180/bag suggesting cracks in pricing discipline
• Sector starts FY14 on a weak note- avg prices at Rs280/bag down Rs15/bag or -5 percent mom & 8 percent yoy in Apr-13. Sharp 3 percent mom cuts seen in south & central region
• Cement demand remains extremely weak. Estimate cement dispatches to have grown of 3 percent yoy in Q4FY13 against a healthy 9 percent growth seen in Q4FY12. FY13 demand growth ~5 percent
• Downgrade risk to earnings elevated in the backdrop of weak pricing power. Retain Reduce on ACC. Hold on Ambuja, Ultratech & Shree. Remain positive on Grasim & Madras Pricing power remains weak, all India prices down 5 percent mom even is a seasonally strong period

Our pan India dealer survey points out to continued weakness in cement offtake which in turn is severely restricting pricing power of cement manufacturers. Cement prices continue to decline even in a seasonally strong period. Our survey suggests that all India prices have decline ~Rs15/bag or -5 percent mom in April-13. With this we notice that prices are now seeing a yoy decline. The highest decline was witnessed in the eastern region (-6.7 percent mom) followed by western (-6 percent mom) & central (-5.7 percent mom) mainly led by subdued demand in the system which is further impacted by labor shortage due to seasonal harvesting activities.

Clear absence of pricing discipline, AP price at Rs180/bag ~ to break even As mentioned earlier we see absence of meaningful seasonal cement price uptick as subdued demand growth restricts pricing powers for cement manufacturers. Infact we see some clear signs of weakness in pricing discipline as Andhra Pradesh (AP) cement price have now dipped to levels of Rs180/bag. At these levels we believe that most of the AP based producers are closer to break even cost of production.

4Q number reflects weak sector internals
Weak sector internals are clearly reflected by dismal topline performance reported by some cement companies in their 4QFY 13 performance. For eg. Ultratech reported a mere 1 percent growth in its topline while Shree cement reported a 2 percent yoy cut in its cement revenues. The profitability for the companies was cushioned by a substantial decline seen in intentional coal & petcoke prices.

Stock performance not reflecting risk of potential downgrades
Cement stocks have been performing well with 12 M performances still being in the green despite earnings cut across the board (in H2FY13) led by weak market dynamics. This clearly shows that the stocks are yet to reflect any meaning full de-rating to factor in the underlying weak near term earnings trajectory and we do not get comfort with stock's current rich valuations . Hence with the risk of potential downgrades still remaining elevated, we see little scope of any further out performance.

Retain Reduce on ACC. Hold on Ambuja, Ultratech & Shree. Remain positive on Grasim & Madras
We remain negative on ACC while retain our HOLD rating on Ambuja & Ultratech. We remain positive on Grasim (led by expected bottoming out in VSF business profitability. In mid caps we prefer Madras Cements (robust volume growth, low energy cost inflation and accelerated debt repayment to help stock outperformance) & Shree Cement (though near term earnings would remain weak for Shree led by lower volume & subdued pricing in Northern & Central Region).

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