Posted by: Pradeep | September 25, 2008

Stock Market India – Cement Sector – EXIT

 

   

Decline in Capacity Utilisation

In CY08, the cement industry added about 30.4 million tonnes (MT) of capacity. The total installed capacity of the industry now stands at 203.5 MT. On account of capacity additions, the capacity utilization of the industry in the April-July 2008 period has dropped to 88% from 95% in the corresponding period in the previous year. About 110 MT of cement capacity addition projects are currently under implementation. Thus, going ahead, capacity utilization of the industry is likely to decline further.
 
Real-estate slowdown
On the demand side, cement consumption after reporting growth of 10% in the last three years has slowed down to 8% in FY09. Housing and construction are the two major user industries for cement. The slowdown in real estate has adversely affected the industry. With the upward movement in interest rates, offtake of cement from the construction industry is also likely to slow down.
   
Rising Cost
On the cost front, there has been a sharp rise in coal prices. The price of South African coal in August 2008 was US$163, up 170% YOY. The price of domestic coal increased about 10-15% in December 2007. However, over a period of time, the coal available to domestic players from linkages has declined to 57% in FY07 from 69% in FY03. Apart from this, in the first week of June the government raised diesel prices by Rs 3. In the current calendar year, diesel prices have increased by 10%. This, in turn, has increased the freight cost for the cement industry.
   
Reduction in Pricing Power
On the price front, the movement in WPI indicates that in mid August 2008, all-India cement prices were up only 3%  YoY. Thus, margins of the industry are likely to decline. Going ahead, massive capacity additions coupled with government intervention to control inflation will reduce the pricing power of the industry.
 
As most frontline cement players are trading close to US$90, investors are recommended to exit cement stocks.
   
 

Company

FY08

FY09E FY10E
Sales Net Profit Sales Net Profit Sales Net Profit
ACC 7007 1312 7494 1104 7898 989
Ambuja Cement 5705 1399 6378 1226 6761 1137
Grasim 17037 2655 18176 2348 19709 2245
Madras Cement 2012 408 2655 428 3156 497
India Cement 3044 665 3892 709 4415 720
Ultra Tech 5509 1008 6602 1003 6823 846
Shree Cement 2066 288 2523 366 2753 396
JK Cement 1458 265 1525 178 2376 227
  Source: Company, ICICIdirect Research, Reuters
*Figures for ACC & Ambuja are for CY08, CY09 and CY10
   
  Exhibit 2: Valuations
 

Company

ACC Ambuja Cement Grasim Madras Cement India Cement Ultra Tech Shree Cement JK Cement

FY10 (EV/Tonne)

87 120 85 85 86 83 39 55
  Source: Company, ICICIdirect Research, Reuters
*Does not factors in the 3.5 MT greenfield plant scheduled to come on stream in March 2010
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