Wednesday, April 22, 2009

>Cement Sector (EMKAY)

Q4FY09 - Strong dispatch numbers, better realizations and lower costs

* We expect Q4FY09 to be a strong quarter for the cement sector mainly driven by a 9.4% dispatch growth, better realizations and easing of cost pressures.

* Following strong growth in dispatches cement prices have defied consensus expectations and have risen by Rs15 bag and are currently ruling at Rs246/bag as compared to Rs231/bag in early January 2009. However it is to be noted that since most of the hikes were effected form mid February 2009 the average price increase in Q4FY09 over Q3FY09 has been just Rs3 per bag i.e. Rs238/bag in Q4FY09 as compared to Rs235 in Q3FY08. On a yoy basis, Q4FY09 cement prices are up Rs6/bag or 2.6%.

* We expect the cement companies under our coverage to report a 10.6% yoy topline growth. Pure cement sales are expected to be up 15.5% driven by volume growth of 7% and net realisation improvement of by 8.5% (benefits of excise duty cuts not passed on).

* At operational level, we expect cement companies in Emkay universe to witness a decline of 293bps yoy in EBITDA margins to 26.3%. However on a qoq basis, the same is expected to improve by 264bps on account of better realisations and easing cost pressures during the quarter.

* Overall we expect the cement companies to report a marginal 0.2% decline in their EBIDTA as compared to a huge 19.3% decline witnessed in Q3FY2009. Infact pure cement EBDITA is expected to improve 8.1% yoy. EBITDA/ton is expected to touch Rs1064 as compared to Rs907 in Q3FY2009, i.e. a huge 17% improvement QoQ.

* Rising interest cost and higher depreciation charge on account of continuous capex will lead to net profit of Emkay cement universe falling by 6% yoy. However the same is significantly lower than 21.1% decline witnessed in Q3FY2009.

* We have been positive on the sector on account of sharp moderation in cost pressures, better than expected dispatches and higher cement prices. Maintain positive view on the sector and believe that impending consensus earnings upgrade and severe under ownership of the sector will continue to fuel outperformance. ACC, Ambuja Cement, Ultratech Cement and India cement are our top pick in the sector.

To see full report: CEMENT SECTOR