>CEMENT SECTOR

■ Cement manufacturers in southern region intimate price hike of Rs30-35/bag effective Sept 7– Prices in other regions largely stable

■ Dealers confirm price hike - but skeptical about absorption capacity of market given sluggish offtake and ample supply – Dealers suggest net price could be Rs10-15/bag

■ Assuming best case effective price hike of Rs15/bag for south, H2FY11 entry prices could be higher than our est by Rs10/bag. Earnings of our coverage cos could get upgraded by 4-36%

■ Maintain current earnings estimates pending uncertainty of effective price hike. Maintain NEUTRAL view on sector – pricing discipline and its sustainability remain key factors

Cement manufacturers in southern intimate price hike of Rs30-35/bag
Cement stock surged 5-15% in yesterday’s trade following news flow of price hike in Southern region. In a knee jerk reaction, cement manufacturers in south have intimated dealers that cement prices will be raised in key markets of Hyderabad and Chennai by Rs30-35/bag effective – 7th September 2010. Cement prices in Hyderabad which were hovering at around Rs138-140/bag, will go up to Rs178-180/bag, an increase of Rs30/bag. Similarly cement prices in Chennai market which were at Rs175-180/bag will be raised to Rs215-220/bag. We would like to highlight that cement price in southern region had fallen close to Rs60/bag from the recent peaks in April 2010. For example cement prices in Hyderabad fell from Rs200-210/bag in April to Rs140-150/bag in August. This sharp decline resulted in smaller cement manufacturers making cash losses.

Dealers wary about markets absorption capacity of the markets
Cement dealers have been surprised by the extent of price hike (Rs35/bag is amongst highest ever single price increase) and also the timing of hike (Dealers were expecting a seasonal price hike by early October). Though the prices have been hiked by Rs35/bag, dealers say that on account of a nation wide strike today (7th Sept - nationwide strike called by trade unions to protest against price rise, violation of Labour laws etc ) the dispatches on new prices will start only in next couple of days. Dealers also opine that given the sluggish cement offtake and ample supply, the markets are unlikely to absorb such a sharp price hike. For example, recently cement prices in Mumbai market were hiked by Rs8-10/bag. However with poor cement offtake cement manufacturers had to roll back price by Rs4-5/bag, resulting in net price hike of Rs4-5/bag. Dealers suggest that over a period of next couple of week, the effective price hike could be in the range of Rs10-15/bag. We believe that it will be only by 2nd-3rd week of September that we will see the absorption capacity of the southern markets.

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