Wednesday, December 16, 2009


Overall cement sector despatches for November ’09 (including ACC and Ambuja Cement-ACEM) registered a healthy 8.6% YoY growth at 15.68mnte (10.9% growth YTDFY10). We believe this is ahead of Street expectations as: i) despatches growth dropped to 6.3-7.5% over September-October ’09, ii) despatches growth of 8.6% in November ’09 is on a high base of 12% growth registered in November ’08 and iii) this is despite continued sluggishness in demand growth in the South. Post the price hike of Rs10-15 per 50-kg bag in Andhra Pradesh effective December 1, ’09, our channel checks indicate further hike of Rs5 effective December 10, ’09. We believe the sector is entering a seasonally strong demand period post the monsoons and festival season and, hence, should witness minimal pricing pressure. We reiterate our positive stance on the sector and Grasim and ACEM remain our top picks.

Aditya Birla Group – Leading the pack; but ACC still lags. The Aditya Birla Group (Grasim and UTCL) reported despatches growth of 15.3% for November ’09. ACEM despatches were up 4.8%, while ACC posted 3% decline. Amongst others, Jaiprakash Associates, India Cements, Madras Cements and Shree Cements registered despatches growth of 46.3%, 25.6%, 18.1% and 15.2% respectively.

Despatches pick-up in West; South remains sluggish; rest of India sustains strength. Despatches from the West were up 10.6% YoY; Central, North & East registered YoY growth of 13%, 9.8% & 8.9% respectively. However, South remains sluggish, with muted growth of 4.6% YoY. All India utilisations (excluding ACC and ACEM), as per the CMA, improved to 80% vis-à-vis 78% reported in September ’09. Utilisations for November ’09 in the Central, North & East remained strong at 106%, 87% & 85%, while those of the West & South stood at 77% & 68% respectively.


Attractive valuations. We believe cement is a structurally strong domestic growth story over the medium-to-long term and any short-term cyclicality weakness should be used as a buying opportunity. We expect supply to be managed/staggered, while demand would regain strength, reducing supply-demand mismatch. We reiterate our positive stance on the sector. Concerns about oversupply are already reflected in current prices and any uptick in cement prices should positively surprise the market. Cement stocks have outperformed the Sensex 3-15% over the past month.

Top picks – Grasim and ACEM. We prefer North-based companies as well as players with capacity additions in the North as these would see better incremental realisations (Grasim and ACEM), early capacity additions (Grasim and UTCL) and higher cost savings (Grasim, UTCL and ACEM). Also, we recommend BUY on UTCL (on reduction in valuation discount post the proposed restructuring) and ACC (on attractive valuations and diversified presence).

To read the full report: CEMENT SECTOR