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Cement: Strong pricing drives earnings outperformance

Motilal Oswal | 10 Aug, 2012  | Follow Author | Add to my Favourites 
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3 favorable trends, 3 positive expectations; Upgrading EPS 4-6%; potential for further 10-20% upgrade

- Trend #1 Strong realizations across companies, beating estimates by wide margins

- Trend #2 In-line costs, with no major surprises; cost push showing signs of moderation

- Trend #3 Meaningful upgrades across companies; street yet to catch up

- Expectation #1 Stabilizing cost factors should assuage cost inflation

- Expectation #2 Strong realizations even in monsoon season to drive further upgrades

- Expectation #3 Meaningful upgrades in consensus estimates to drive stock prices Prefer

Ambuja and UltraTech/Grasim among large-caps, and Shree Cement among mid-caps.

Q1FY13 numbers decipher more positives, no negatives

The cement majors have reported strong numbers for Q1FY13 (EBITDA 9-18% ahead of estimates), amidst a mixed bag of expectations – improvement in operations coupled with regulatory concerns post the adverse verdict by the Competition Commission of India (CCI). The robust performance is attributable to (1) strong QoQ improvement in realizations (6-8%), and (2) in-line volumes and cost push (which has been showing signs of stabilization). Given our positive outlook, Motilal Oswal have upgraded their earnings estimates (4-11% for ACC, Ambuja and UltraTech), backed by 10-12% upward revision in realization assumptions.

Favorable trends portend further upgrades

Motilal Oswal expect stabilization in costs, driven by (1) declining prices of imported coal, (2) stabilization in freights, and (3) improving operating leverage, backed by higher utilization. Realizations are likely to remain healthy, even over seasonally weak periods, with only a moderate dip. Though Motilal Oswal have significantly upgraded their realization estimates (10-12%), they see further upsides, as (1) implied realizations for FY13/FY14 are within 2-3% range of Q1FY13 levels, and (2) for new capacities to be viable (based on 15% CRoIC), realizations need to be ~12% higher than the current cement prices. Base1d on their current estimates, the large-cap cement companies are trading at historical average valuations (EV of ~8x FY14E EBITDA). While consensus estimates are upto 17% lower than their estimates, Motilal Oswal expects meaningful upgrades in the same with positive outlook on price resilience, which should drive valuations.

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About Motilal Oswal

Motilal Oswal was founded in 1987 as a small sub-broking unit, with just two people running the show. Today it has a 2000 member team with a networth of Rs7 bn and market capitalization as of March 31, 2008 at Rs19 bn.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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