Cement Q1FY13 preview: Set for a strong performance
- Robust demand continues: Nirmal Bang's coverage universe companies’ sales volume is expected to grow 8% YoY, driven by the low base in 1QFY12 and pick-up in demand. Ambuja Cement and Shree Cements are expected to report sales volume growth of 10% and 25%, respectively. Going ahead, Nirmal Bang expects cement demand to show a CAGR of 8% over FY12-14E on the back of benefits resulting from a fall in interest rates, pre-election infrastructure spending, pick-up in individual housing/affordable housing and sustained demand from the infrastructure segment.
- Sequential growth in cement prices: During the quarter, cement prices across India have shown volatility, but overall they increased by an average Rs15-18 QoQ, at Rs 312-315/bag, primarily driven by continued production discipline coupled with improvement in demand. Subsequently, Nirmal Bang expect blended realisation for the quarter to be higher by 2%-5% QoQ. Eastern and Central regions witnessed an increase in prices by Rs 40/bag and Rs30/bag, respectively, which was higher compared to other regions. Northern and western regions have witnessed increase in cement prices by Rs 10-15/bag, but in the southern region the prices remained stable.
- Cost inflation to moderate: The benefits of a sharp increase in realisation is expected to be offset due to cost inflation, which includes the full impact of increase in rail freight, higher power costs and negative operating leverage following lower capacity utilisation. This would lead to a decline in EBITDA margin for companies in the coverage universe by 170bps YoY to 24.3%. However, during the quarter, coal prices have fallen 25%, which will benefit the industry from 2QFY13 onwards due to coal inventory.
Outlook: Nirmal Bang believes the regulatory overhang (Competition Commission of India penalty) is over and the investors would start looking at fundamentals after the monsoon season gets over. Also, the fundamentals of the sector are intact and have gradually started to gear up for the cyclical upturn in the next two years. The key reasons behind the view are narrowing demand-supply gap, likely improvement in effective capacity utilisation rate and moderation in cost inflation. All this would lead to improvement in operating profit and a re-rating of the valuation multiple. Hence, Nirmal Bang retains their positive view on the sector.
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