>CEMENT SECTOR (MOTILAL OSWAL)

Seasonality, weak demand hit pricing

We interacted with cement dealers and marketing personnel of cement firms, across regions and brands, to understand the demand-supply scenario, pricing trends and short-term outlook.

Prices decline by Rs3-20/bag: The monsoons, sluggish demand and new capacities have caused cement prices to fall by Rs4-5/bag on average and Rs10-20 in select markets. Prices fell in the south by Rs5-15/bag, in central India by Rs10-15/bag, the north by Rs2-3/bag and in Maharashtra by Rs5-20/bag (with a higher decline in Pune).

Seasonality, slow progress in infrastructure projects hit demand: Cement demand, which has been driven by individual housing and pre-election spends on infrastructure, slowed - due to monsoon and sluggish demand from infrastructure. But there are early signs of demand recovery from organized real estate in some markets.

Price moderation and cost inflation could affect near-term financials: While the demand and pricing outlook for the next two to three quarters is cautious, demand-supply dynamics are expected to improve from 4QCY10. The shortterm outlook is negative due to the impact of the monsoon on rural demand and muted urban housing demand, new capacities and cost inflation.

Valuations and view: We will review our estimates to factor-in changes in recent trends. Our current estimates factor in flat QoQ realizations in 2QFY10 and Rs5/bag QoQ decline in 3QFY10. For FY11 our estimates factor-in Rs10/bag decline over the FY10 average. Cement stock valuations are attractive. We prefer companies with strong cost-saving possibilities that are ahead of the curve in adding capacity. Among large-cap stocks, Grasim and UltraTech are our top picks and we prefer Shree Cement, Birla Corp and India Cement among mid-caps.

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