Wednesday, March 25, 2009

>Cement Sector (MOTILAL OSWAL)

Prices recover; short-term outlook positive; upgrading FY10 estimates

We interacted with various cement dealers and marketing personnel of cement companies across regions and across brands, to understand the evolving demand-supply scenario, pricing trends and short term outlook.

Prices recover by Rs5-20/bag: Cement prices have increased across all key markets by Rs5-20/bag, except in a few pockets such as Gujarat and south India (excluding Andhra Pradesh). While price increases in central India (Rs15-20/bag), east (Rs7-10/bag), north (Rs10-15/bag) and Andhra Pradesh (Rs8-10/bag) markets are driven by strong demand, price increase in the west is despite muted demand.

Demand boosted by individual housing, pre-election infrastructure spend: Cement demand over the last 3 months is driven by individual housing and pre-election spend on infrastructure by both the state and Central governments. However, demand from organized real estate, ITES and organized retail has fallen.

Short-term demand outlook positive, but medium-term outlook remains uncertain: All the dealers/marketers we interacted with are confident that the momentum in demand will continue at least until June 2009, driven by ongoing infrastructure projects, individual housing and completion of ongoing real-estate projects. But demand outlook beyond June 2009 is uncertain; this would depend on a revival in organized real estate and initiatives by the new government.

Upgrading earnings, led by improvement in realizations: For companies under our coverage, we are upgradinig our earinings estimates by 12-26%, driven by improvement in cement prices across key markets as well as cost savings in energy, freight and other expenditure. We are also rebasing our cement price assumptions to Rs10/bag decline in FY10 from current levels (v/s Rs10/bag decline over FY09E average).

Valuations attractive: Asset valuations for all the companies are below the replacement cost of US$100/ton. Cement stocks have outperformed the benchmark, driven by positive news flow in form of higher demand growth, stronger pricing and positive government actions. However, post 1QFY10, impending excess supply situation would put pressure on volumes and profitability. Among large cap stocks, Grasim remains our top pick, and we prefer Birla Corp and Shree Cement among mid-caps.

To see full report: CEMENT SECTOR