>INDIA: BULDINGS - MATERIALS (GOLDMAN SACHS)

■ Small price hikes in South/West; short-term phenomenon: After recent sharp declines in cement prices in the South and West (Rs40- Rs80 decline/10%-35%), some cement makers have announced small price hikes of Rs5-10. In our view, while demand momentum has started to pick up, the price hikes are largely driven by logistics bottlenecks, with government giving priority for allotment of railway wagons to essential commodities such as food grains. While we are not surprised by these price hikes, given the steep declines recently, we believe that higher prices will not be sustained in an environment witnessing excess supply.

■ Price decline widespread, prices soften in resilient North & East: While we have started to see a marginal correction in prices in the North and East—so far, prices have been relatively stable in these regions on the back of strong demand—we expect the price decline to be sharper as new capacity starts coming on stream; North: 11 mn tonnes to come on stream in next 12 months (23% of FY09 capacity); East: 10 mn tonnes (32% of FY09 capacity).

Price hikes unsustainable as excess capacity looms; stay cautious

■ Another 6mn MT of capacity added in Oct'09, remain cautious: The industry has added 26mn MT of fresh capacity in the first 7 months of FY2010, which compares with 21mn MT added in the entire FY09, and is about 12% of end-FY09E capacity. Based on the latest capex data from CMIE, another 40mn tonnes of capacity is planned to be commissioned in the next 12 months. While we expect demand momentum to stay strong going forward, we expect supply growth to outstrip demand—to contextualize, FY10E consumption at 200mn MT (12.5% yoy) vs. FY10E end capacity of 270mn MT implies 7-yr low capacity utilization of 75%.

■ Bank on volume growth; Buy Ultratech, Sell Ambuja, ACC: In a firm pricing environment, we continue to prefer companies which are best positioned to benefit from potentially strong 2HFY10 demand momentum—we reiterate Buy on Ultratech Cements (ULTC.BO) as we believe that its strong volume growth from newly commissioned capacity and improved operating efficiency should partially offset impact of declining prices. Our favorite Sell ideas are Ambuja Cements (ABUJ.BO, Conviction List) and ACC (ACC.BO) on the back of industry lagging volume growth and expensive relative valuations. Key risks include higher-thanexpected urban demand, delay in capacity additions.

To read the full report: INDIAN CEMENT SECTOR