Wednesday, November 29, 2006

>King Cement

Cement industry’s performance once again has beaten the market expectation in the recent quarters and has registered spectacular growth. Looking at the demand supply mismatch, firm price realization, and operational efficiency it is believed that this sector still has potential to perform in the near future.
The cement prices have witnessed appreciation of Rs.5 per bag second time post monsoon on account of robust demand in construction and infrastructure segment. Currently Indian cement industry is witnessing a growth of 9.5% - 10% in consumption whereas supply is growing at 8% rate annually, thereby creating a shortage in the domestic market.
All India Price movement of cement price (Rs per bag)


Quarterly Performances:
In the quarter ended September, 2006, the industry registered a growth of 47.5% in top line and 185% in the bottom line. Operating margin has reached 28% on account of firm realization, demand-supply mismatch and reduction in coal prices. The net profit margin has almost doubled to 17% despite a huge tax provision and higher deprecation cost.

Investment Argument

  • For the month of October 2006, all India cement despatch figure has improved by 8% on YOY basis to 12.55 million tonne.
  • Around 12-15 TPA additions in demand is expected due to approvals of more than 130 SEZs and NHB’s project of ‘A’ house for Rs 1 lakh on massive scale.
  • The proposed capacity expansion of about 70 million tonne is expected to come on stream over the next 2-3 years, which may create surplus of supply, but it is believed that most of the capacities will start from the second half of FY08 and beyond.
  • So for the next one-year cement sector will experience deficit, which will give positive outlook for cement industry.
Cement despatches – Strong growth continues
All India cement despatch figures improved by 7.96% y-o-y to 12.55mn tonne and m-o-m increase was 3.64%. Despatch for the 7-month period ended October 2006 increased by 9.98% to 86.27 mn tonne. The industry has seen increase in despatches grow by 7.96% despite increase in production capacity by 5.96%. The capacity utilization of the industry has gone up from 90.24% to 93.24%.

Most of the plants are operating at the optimum level and the capacity utilization has gone up to 93 % in October month and it is expected to go up further. Most of the companies are investing heavily in installing the captive power plant in order to reduce the power and fuel cost, which accounts for about 28%-30% of total production cost. Any reduction in this cost has direct impact on the operating margins of the companies.

Proposed Capacity Expansions:
The proposed capacity expansion of about 70 million tonne is expected to come on stream over the next 2-3 years, which may create surplus of supply, but it is believed that most of the capacities will start from the second half of FY08 and beyond. So for the next one-year cement sector will experience deficit, which will give positive outlook for cement industry.
In Mn. Tonnes
Completion Year
Region
FY07E
FY08E
FY09E
North
1.7
9.5
10
West
1.1
0.5
5.3
South
0.6
4.9
18.3
East
0.5
-
12.7
Central
0.5
4.7
-
Total
4.4
19.6
46.3

Valuation:
Despite sharp increase in the stock prices in the recent past, Broking house Anagram Stock broking is bullish on some of the stocks in the sector like Ultratech Cement, Shree Cement and India Cement.
Top picks in this sector as per Broking house India Infoline are Kesoram industries, Ultratech and shree cement. It has also given hold recommendation for ACC.

Net Sales
PAT
Name Q2FY07 Q2FY06 % Change Q2FY07 Q2FY06 % Change
ACC 1,358 1,084 25 225 192 17
Amb. Cem. East. 147 120 22 33 19 77
Birla Corp. 365 282 29 68 17 292
Chettinad Cement 187 101 85 34 6 491
Dalmia Cement 250 139 80 52 12 344
Guj. Ambuja Cem 984 773 27 245 88 178
Guj. Sidhee Cem. 89 71 26 9 5 76
India Cements 516 347 49 117 7 1,525
J K Cements Ltd 268 222 21 34 8 336
J K Udaipur Udyo 27 27 2 -10 -7 35
JK Lakshmi 163 153 7 23 11 106
K C P 58 35 68 10 3 240
Kalyanpur Cement 29 18 58 -5 -5 11
Madras Cement 407 243 68 90 10 839
Mangalam Cement 120 86 39 20 7 184
Mysore Cement 151 96 57 20 -17 223
Prism Cement 159 127 25 22 3 561
Shree Cement 316 144 119 78 28 178
UltraTech Cem. 1,005 783 28 127 24 434










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