>Indian Cement Industry (UBS)

Turn positive on the sector

■ Turn positive as capacities get delayed; pricing pressure unlikely to materialise
We turn positive on the sector as: 1) we believe cement prices are unlikely to fall in FY10 on a YoY basis—based on our channel checks, we lower our excess capacity estimates (from 22-24% to 15% for FY10-12 on expected project delays/cancellations); 2) we estimate higher despatch volumes as we raise our capacity utilisation estimates to around 85% from around 80%; 3) higher consolidation (top two/five companies have 38%/58% capacity) will enable supply to be more responsive.

■ Assume demand to grow conservatively at 5% in FY10
We estimate cement demand to grow at 5% in FY10 in line with UBS’s India GDP forecast of 5.1%. Historically, cement demand has grown at an average 1.4x the real GDP growth rate. We believe cement growth in excess of 5% will further reduce excess capacity in FY10, alleviating concerns on price declines.

■ Raise our net realisations, volume assumptions; factor in lower coal costs
We now factor in no YoY decline in average gross prices for FY10 though we estimate average net realisations to increase by around 4% YoY in FY10 due to excise cuts (4%) and recent price hikes (we earlier estimated declines of 8-11% YoY for FY10). We factor in higher despatch volumes. We assume lower coal costs of US$90/100/ tonne for 2009-10 (US$115-121/tonne earlier) but this is offset by our higher FX assumption of US$/INR of Rs54.95/52.13 for 2009/10 (earlier Rs48.75/Rs46.13)

■ Preferred picks in the sector: Grasim and Ambuja
Our preferred picks are: 1) Grasim due to front-loaded capacity addition and a significant increase in captive power capacity; and 2) Ambuja due to a significant increase in captive power capacity, its net cash position, and a significant scheduled cement capacity increase over 2010. We also have Buy ratings on ACC and India Cements.

To see full report: INDIAN CEMENT INDUSTRY