Motilal Oswal's report on Cement sector
IIP data reported encouraging 16.5% YoY growth in cement production in July 2014 (the highest-ever since November 2011).
YTDFY15 production growth stood at 11.2% YoY and TTM growth bounced up to 6.1% versus a low of 3.3% in March 2014.
Recent channel interactions highlight sequential demand moderation in August as the impact of monsoon was overshadowing, with broad expectations of a subdued monsoon.
Post a strong resilience in July 2014, due to delayed monsoon, prices plunged INR10-20/ bag across regions in August (albeit up 8.7% YoY).
Price decline in western regions (ex-Mumbai) was high at INR20-30/bag but there was a sharp rise in June-July too. Prices in southern states declined by upto INR15/bag.
Commencement of ABG plant (3mt) by 3QFY15 and Nirma (March 2015) are being seen as a threat to cement pricing by Gujarat and Rajasthan dealers.
Strength in demand in FY15YTD with 11% growth, leads upgrade in our industry volume growth estimate to 10% each in FY15-17 (v/s 6%/8%/10% earlier).
In large-caps we prefer ACC, UltraTech and Shree Cement, whereas in mid-caps we prefer Dalmia Bharat, JK Cement and JK Lakshmi Cement.
As per IIP data, Cement industry volume grew 16.5% YoY in July 2015, implying ~11% growth FY15YTD.
YTD growth of ~11% is a positive surprise, especially considering elections would have affected demand during April-May 2014.
Considering muted demand growth of 4.6% CAGR over FY10-14, and historic electoral mandate to the BJP government, we are upgrading our Industry demand growth estimate to 10% each in FY15/16 (v/s earlier estimate of 6%/8%/10%). This implies 7.2% CAGR over FY12-17E.
As a result, we now estimate capacity utilization to improve to ~70%/73%/79% by FY17 (v/s earlier estimate of ~68%/70%/75%. Based on producible capacity (based on clinker capacity), utilization levels would be 80%/85%/90% in FY15/16/17.
We estimate cement prices to improve by ~INR13/20/20 per bag in FY15/16/17.
Valuation & View
Demand recovery has being faster and higher than expected. This coupled with slowing capacity addition and higher capex and opex cost would support cement prices and profitability going forward.
Sustained recovery in demand would act as catalyst stock performance.
Any government intervention in cement pricing poses threat to our positive view.
In large-caps we prefer ACC, UltraTech and Shree Cement, whereas in mid-caps we prefer Dalmia Bharat, JK Cement and JK Lakshmi Cement.
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