>INDIA HARD HAT (JP MORGAN)

Supply additions continue to creep up, while South remains weak

• Y/Y demand growth looks good, but South India weakness is a concern: India’s June-09 cement dispatches grew 13% Y/Y (+1.3% M/M). We believe a benign base, combined with continued strong demand in North and East India, was the key reason for the strong Y/Y dispatch growth. While we expect the base to stay supportive until Nov-09, we believe the continued slowdown in South India is a concern. The May-09 cement consumption increased only 1% Y/Y in South India, with two of the top three markets (Karnataka and Andhra) declining. Usually, South India does not get affected by the monsoon rains in the July-Sept period. Although 1Q has seen capacity additions of 15MT, we highlight that it does not yet include the large green-field units of Grasim.

• Mixed cement price trends: While the J.P. Morgan National Cement Price Index increased 0.7% M/M, pricing trends were mixed across India. Some pockets of Eastern and Northern India continued to see cement price increases of Rs3-8/bag in June/early July; however, most of the South India and pockets of Western India saw price declines. Southern India was the first
off the blocks in terms of capacity addition, and we believe continued ramp up of capacity, combined with weak demand, is likely to see more supplies to Western markets, thus affecting the prices. Although cement prices did not fall over the past three monsoons, we expect price declines this year.

• The time frame to achieve capacity ramp up: Over the past three years, the Indian cement industry has added capacity mainly through debottlenecking and small brown-field expansions. However, an analysis of some of the green-field units over the past two years suggests that from clinker commissioning to the ramp up of 70% capacity utilization can take as much as 8-9 months, as the power plant, grinding units and bagging units come in place.

• Quarterly results—we expect a record quarter: We expect cement companies to post record earnings and margins in the Jun-09 quarter (please see Figure 6 for details) as the full benefit of higher prices flows through.

To see full report: INDIA HARD HAT