Angel Broking upbeat on cement, recommends JK Lakshmi

Angel Broking has come out with its report on cement space. The research firm maintains Neutral view on the sector.

Healthy performance on the volume front: During 3QFY2012, our cement universe posted reasonably healthy 8.1% yoy growth in volumes, much better than 3.9% dispatches growth reported in 1HFY2012. Volume growth in 3QFY2012 was led by strong pick-up in demand across regions, with the western region posting the highest 25.0% yoy growth. The southern region, which had been posting a decline in demand over the past six quarters, showed signs of revival with 3.2% yoy growth, aided by cooling of Telangana agitation. Demand in the western region was boosted by improved offtake from governmentsponsored projects, infrastructure and individual housing segments. Madras Cements, predominantly a south-based player, was the top performer in the universe, registering 19.1% yoy volume growth. Ambuja Cements was the top performer amongst large players, reporting 10.8% yoy growth.

Strong performance on the realization front negates cost pressure: Power and fuel cost for the universe rose by 10.7% yoy due to twin effects of higher coal prices (both domestic and imports) and cheaper INR vs. USD. Freight costs were also higher by 12.5% yoy due to the increase in diesel costs and surcharge levied by railways. However, growth in cement realization was too strong to offset cost pressures. OPM of the cement universe rose by healthy 267bp yoy to 21.6%, with all companies under our coverage barring Ambuja Cements posting OPM expansion in the range of 100bp to 1,350bp on a yoy basis. JK Lakshmi posted the highest expansion in OPM of 1,352bp yoy to 21.4%. Cement realization, which had remained strong in the past one year due to producer discipline, was aided by pick-up in demand. Our cement universe posted 18.4% yoy higher realization during the quarter; on a sequential basis, realization was higher by 7.5%.

Outlook and valuation: Going ahead, the rate of capacity addition is set to moderate, with only 31mtpa of capacity expected to be added over FY2012-13E, much lower than 55mtpa added over FY2010-11. However, demand slowdown has become a bigger concern with FY2012E demand growth expected to be ~5%. Thus all-India utilization in FY2012 is expected to be 72.4%. In our view, the cement sector

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