Cement: North, Central continue uptrend, AP bounces back

Emkay Global Financial Services has come out with its report on cement space. The research firm remains 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 and Madras Cements (strong volume growth and improving cost structure led by better power efficiencies).

Our Channel check in October-2012 suggests that prices in Northern and central region have continued to move upwards by 2.6% and 4.3% mom while bounce back in Andhra Pradesh has led to 4% mom improvement in southern average cement prices. However eastern region prices remain flattish due to lack of demand in the ongoing festive season while prices in western region have decline by 2.9% mom post a series of unusual price hikes experienced in the last quarter.

Northern Region: Upward movement in cement prices continues with demand improvement-

• Prices in the region have been hiked by Rs5-15/bag led by an improvement in demand over the last month. On an average prices have improved by 2.6% mom and 0.2% higher than Q3FY13 averages.
• Pockets like Delhi, Haryana and Chandigarh witness the maximum hikes in the region on the back of improved demand and anticipation of further improvement in project activities post the Navratre festive season.
• Even though prices in Punjab have also been hiked by ~5/bag, problem of sand availability continues as the government’s decision over the mining issue has been post poned to November 2012 (earlier schedule was for October 2012). This has led to demand remaining at almost same levels as last month despite October being a month when demand starts improving usually in the region post harvesting. Dealers expect the prices to remain flat in the region for the coming month as the demand driver remains absent till November.

Central Region: Highest improvement in cement prices mom- 

• Prices in the region have improved by Rs10-20/bag over the last one month despite no significant improvement in demand in Uttar Pradesh.
• However demand has improved substantially in pockets like Bhopal in Madhya Pradesh where prices have seen hikes of close to ~Rs10/bag over the past one month with further hikes announcements expected in a few days.
• Average prices in the region at Rs289/bag have improved 4.3% mom and are already 1.5% higher than Q2FY13 averages.

Prefer ACC as current high valuations for companies in the sector have left little room for further outperformance for stocks like UTCEM and Ambuja (ACC’s valuation at 8.5X EV/E, USD 140 EV/T, provides reasonable comfort compared to expensive valuation for Ambuja EV/E 9.3X & EV/T USD 180, Ultratech- EV/E 9.7 X, EV/T –USD167). 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 and Madras Cements (strong volume growth and improving cost structure led by better power efficiencies).

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