>CEMENT SECTOR (GOLDMAN SACHS)

Strong demand n-t, but mismatch imminent; Ambuja on CL-Sell

Industry context
Three triggers for this industry update: 1) Stronger-than-expected demand over the last few months and improving economic fundamentals - we raise our cement demand CAGR estimate for FY09E-FY12E by 140bp to 8.3%. (2) Higherthan- expected capacity additions in FY10E ytd - we raise our supply growth CAGR estimate for FY09E-FY12E by 90bp to 9.2%. 3) We accordingly revise our earnings estimates for our coverage group by -30% to +75% for FY10E FY12E, and our EV/RC-based 12-m TPs by 22%-81% (moving to mid-cycle multiples from
trough previously on greater visibility and reduced risk for demand).

Source of opportunity
We believe that strong near-term demand and producer discipline can potentially delay, but not prevent the emerging demand–supply mismatches, in an industry that enjoys relatively low barriers to entry, and in which a number of players have committed significant capital for new capacity. Hence, we maintain our cautious stance on the Indian cement sector. To contextualize, the industry added 14mn MT of capacity in the first 4 months of this fiscal year alone, which is about 6% of end-FY09E capacity, and compares with 21mn MT added in the entire FY09. We expect the industry to add 31mn MT of capacity in FY10.

Best sell idea
We retain Sell on Ambuja Cements (ABUJ.BO) and add it to our Conviction List. We believe its industry-leading margins have been competed away, and consequently its 25% valuation premium to Indian peers is likely to be affected, in our view. Our new 12-m EV/RC-based TP of Rs80 (from Rs59), implies 19% potential downside. We also retain Sell on ACC (ACC.BO) with revised 12-m EV/RC-based TP of Rs662 (from Rs507), implying 17% potential downside.

Best buy idea
We raise Ultratech Cement (ULTC.BO) to Buy from Neutral with revised 12-m EV/RC-based target TP of Rs894 (from Rs494), implying 19% potential upside. On the back of Ultratech’s strong volume growth and cost-reduction initiatives, we expect 12% earnings CAGR over FY09E-FY12E, the highest in our India cement coverage.

Risks
Key risks include higher-than-expected urban demand, lower-than-expected capacity additions and the impact of the monsoon on the rural economy.

To see full report: CEMENT SECTOR