>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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