>INDIA CEMENTS: Challenging times ahead!! (BNP PARIBAS)

Weak demand in South + excess supply = D/S disequilibrium We downgrade Indian Cement sector to Negative as the pricing outlook is likely to remain challenging given weakening demand in South and West markets. Weakening demand in South (floods, political instability in AP & Karnataka) will likely exacerbate the pricing outlook for South and Western regions (due to inter-regional transfer). The key themes we highlighted in our initiation report titled “pricing resilience and cost deflation – Mantra for FY10” have played out, with cement companies reporting excellent financials for F1H10. We expect growth over the next two quarters to remain weak due to a) a slower-than-expected pick-up in government infrastructure projects, b) high base effect of F2H09, c) lingering weakness in commercial and industrial segments and d) marginal negative impact of monsoon on rural housing demand.

Margins have peaked; lowering FY11 EBITDA estimates by 5-20% for stocks under coverage: Our recent channel checks with cement dealers in South indicate pricing collapse in certain cities (Hyderabad, Chennai and Visakhapatnam). We expect weak pricing to remain over the next 12-18 months with South and West being the most affected. We expect average cement prices to decline by 2% y-y for FY10 and -8.1% y-y for FY11 (driven by south: -13.0% y-y in FY10 and -13.7% y-y in FY11). We lower our FY11 EBITDA estimates by 5-20% for stocks under coverage.

Target Prices lowered for ACC and Ambuja: We are lowering our TP for ACC to INR604 (from INR684) based on 5.0x our CY10 EBITDA of INR21.5b representing a downside of 18.1%. We lower our TP for ACEM to INR85 (from INR95) based on 5.5x our CY10 EBITDA of INR19.7b. We maintain our BUY rating on UltraTech Cement due to a) a potential rerating on consolidation of Grasim’s cement business, b) lowering of exposure to south and west to 57% from 75% (prior consolidation), c) largest Indian cement company with 48.0mt of capacity. We await details on swap ratio for Smruddhi Cement merger with UTCEM before changing our TPs for UTCEM and Grasim.

To read the full report: INDIA CEMENTS