>INDIA CEMENT SECTOR (MACQUARIE RESEARCH )

Monsoon blues or party over?

Event
■ Cement demand seasonal dip: Cement companies reported lower despatches for September. ACC and Ambuja reported marginally negative growth, while Grasim and Ultratech still registered 16% growth. Overall we expect 7% growth for the industry and believe that delayed monsoon and early festivals contributed to lower YoY growth.

Impact
■ Strong demand to continue: Until August, cement demand had been exceptionally strong, growing at 12.8% against our estimate of 9%. While there are some concerns on demand due to a deficient monsoon and its impact on rural demand, we see support coming from a rebound in urban housing and a further boost to infrastructure projects, particularly road projects.

■ Cement prices – slipping but not collapsing: Cement prices on average for all of India are down to Rs244/bag, which is still 7% higher than the average seen last year, ie, in FY08. In fact, due to price increases seen in July and early August, the 2Q FY10 prices are still more or less equal to 1Q FY10 prices. Andhra Pradesh is the only state to see a bit of a collapse in prices, which are down 15% to Rs190/bag. The key reason is a lack of demand here, as the start of irrigation projects has been delayed due to the vacuum created post the death of the chief minister of the state.

■ Clinker stocks low even with high capacity utilisation: The industry had been operating at an 87% capacity utilisation YTD until August, which is higher than last year’s 85%. The clinker stocks have remained low – 16.1 days of consumption lower than last year and well below the 20-day average seen during surplus years.

■ Cement capacity increase – full impact by 2Q CY10: In the last six months an increase of 20mnt, or around 10% of capacity, has occurred. Overall, we expect another 30–35mnt to be added in the next 12 months, with bulk of this coming in the first half of CY10.

Outlook
■ Valuations remain attractive at below a 10x PER: Cement companies are trading below the historical averages seen over last 15 years on all valuation parameters (PER, EV/EBITDA and EV/T). All the companies are trading at or below replacement costs.

■ Top pick remains Grasim and Ambuja: Although we expect the possibility of a surplus in FY11, we believe that the cement price fall will be limited due to stronger-than-expected demand. We recommend taking exposure to industry leaders that are expanding volume faster than the industry and that are taking measures (like captive power plants and split-grinding units) to reduce costs.

To see full report: CEMENT SECTOR