Realisations for the quarter hit by a weak demand March 26, 2015 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Sensex v/s PL Cement Index 180 160 140 120 100 80 Source: Bloomberg PL Cement Index Sensex Stock Performance (%) 1M 6M 12M Sensex (2.0) 5.8 27.5 PL Cement Index (5.7) 12.3 42.6 ACC (3.5) 10.2 22.3 Ambuja Cement (4.2) 17.3 33.5 Shree Cement 0.7 33.0 106.8 UltraTech Cement (7.1) 4.5 39.0 The Ramco Cement (9.9) (7.6) 45.9 JK Lakshmi Cement 6.5 10.9 239.3 India s cement demand continued to remain tepid in March despite being a month of peak activity. Our channel checks suggest that the weakness has been so severe that cement companies have been compelled to cut their despatches by 20 30% even in the Northern region which has been one of the most stable regions. However, we believe that the current weakness in demand is abnormal, influenced primarily by Government s reduced spending to manage the fiscal deficit. We expect a gradual revival in demand to start from Q2FY16 on the back of steep increase in allocations to infrastructure spending as announced in the recent Union budget. Increased Government spending is expected to stimulate private spending which has been under severe pressure for the past couple of years. North Average prices flat QoQ: Despite a price hike of Rs20 30/bag from mid March on the back of cut in supplies, average prices in the region remain flat QoQ due to cut in prices in January (from 2 nd half) and February 2015. West Maharashtra prices up Rs15/bag; prices in Gujarat unchanged: Average price in Maharashtra rose by Rs15/bag QoQ due to a steep hike of Rs30/bag in prices of Pune, partially off set by lower hike of Rs20/bag and Rs5/bag in prices of Mumbai and rest of the state, respectively. Gujarat prices remained flat due to weak prices in adjoining states in the Northern region despite better demand. Central UP s price fell by Rs4/bag QoQ; MP settles with a cut of Rs5: Prices in UP fell due to weak secondary sales and infra sector. Prices in MP fell by Rs5/bag QoQ due to weak prices in UP and Bihar (key market for MP based producers) and subdued demand in the state. South Discipline drives steep hike of Rs40/bag QoQ in region's average: After witnessing a dip in prices in the previous quarter, producers resorted to a tight discipline during the quarter. Hence, average prices in Tamil Nadu/Bengaluru/Hyderabad/Kerala rose by Rs50/Rs30/Rs35/Rs45 per bag QoQ, East Mild price hike of Rs5/bag QoQ: Region's demand was impacted due to contraction in industrial activities across the resource rich states of the region and poor public spending. Prices in West Bengal and Orissa, the most prominent states in the region, rose by Rs5/bag QoQ, while, prices in Bihar rose by Rs8/bag Current weakness in line with expectation; positive outlook remains intact: We were negative on the sustainability of steep price hikes undertaken by cement companies (except Southern region) in beginning of January due to weak demand outlook. All these hikes were reversed to the full due to sharp cuts since the end of Jan 2015 end. Based on our data, realisations for UTCEM/ACEM/ACC are expected to rise by Rs146/Rs148/Rs77 per tonne QoQ for the quarter, respectively. We expect significant divergence in realisations for region specific players due to contrary response of players on pricing. Hence, realisations for Shree Cement and JK Lakshmi Cement are expected to remain flat QoQ against an increase of Rs545 (~12%)/t for Ramco Cement. We continue to remain optimistic on the next 12 month outlook for the sector. However, the recent unusual slackness in demand is likely to put pressure on the sector s earnings in current quarter. We expect the scenario to gradually improve from 2QFY16 onwards. This drives us to maintain our Overweight outlook on the sector on the back of better demand outlook, slowing pace of addition and exit of weak players. UltraTech and JK Lakshmi remains our top picks in the sector. Sector Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Company Valuation Summary Rating CMP (Rs) TP (Rs) EBITDA (Rs m) PAT (Rs m) P/E (x) P/B (x) EV/EBITDA (x) EV/t (USD) FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E ACC BUY 1,580 1,690 16,902 23,203 10,586 14,652 28.0 20.2 3.4 3.2 16.6 11.7 134.4 129.4 Ambuja cement Reduce 220 23,942 27,501 16,295 18,941 23.7 20.4 3.6 3.4 14.0 11.9 200.3 194.9 Shree cement Acc 11,066 12,200 21,246 26,438 9,464 19,155 40.7 20.1 6.1 4.6 17.3 13.3 251.3 220.1 Ultratech Acc 2,796 3,700 59,718 77,419 33,923 43,028 22.6 17.8 3.5 2.9 13.3 10.5 173.0 163.9 The Ramco Cements BUY 284 384 7,887 10,116 3,351 4,995 20.2 13.5 2.3 2.0 12.0 9.2 113.4 111.8 JK Lakshmi BUY 354 475 5,429 7,206 1,599 2,951 26.1 14.1 2.8 2.5 10.6 7.8 103.6 80.0 Source: Company Data, PL Research (All prices as on March 26, 2015) Ramco cement would report the highest increase in realisations for the quarter due to sharp hike in prices in Southern region. On the contrary, realisations for Shree cement and JK Lakshmi would remain flat QoQ on account of weakness in northern, Gujarat and Central region s prices. In case of companies having Pan India presence, we expect Ultratech and ACC to report 7% YoY/3% QoQ in realisations ahead of Ambuja cement on the back of their exposure to Southern region. Exhibit 2: Estimates for realisations of cement companies under our coverage Company Q4FY15/ Q1CY15 Q4FY14/ Q1CY14 Q3FY15/ Q4CY14 Change YoY (%) Change QoQ (%) UltraTech 4,383 4,080 4,237 7.4 3.4 Ambuja 4,449 4,356 4,372 2.1 1.8 ACC 4,645 4, 4,497 6.8 3.3 Shree Cement 3,535 3,863 3,540 8.5 0.1 Ramco Cement 5,115 4,090 4,570 25.1 11.9 JK Lakshmi 3,713 3,809 3,704 2.5 0.2 Source: Company Data, PL Research March 26, 2015 2
North: Region s average price flat QoQ despite steep hike in mid March Exhibit 1: Delhi 230 Exhibit 2: Jaipur 230 220 Exhibit 3: Rohtak 345 315 285 255 Exhibit 4: Bhatinda 220 March 26, 2015 3
West: Maharashtra prices up Rs15/bag QoQ; Gujarat prices flat QoQ Exhibit 5: Mumbai Exhibit 6: Ahmedabad 325 295 265 235 220 Exhibit 7: Pune 400 385 355 325 295 265 Exhibit 8: Baroda 220 March 26, 2015 4
South: Region s average up by Rs40/bag QoQ on the back of a tight discipline Exhibit 9: Chennai 415 395 375 355 335 315 295 275 Exhibit 10: Hyderabad 230 210 190 Exhibit 11: Bengaluru 400 390 380 Exhibit 12: Trivandrum 410 390 March 26, 2015 5
Central: UP s price fell by Rs4/bag QoQ; MP settles with a cut of Rs5/bag Exhibit 13: Bareilly 345 315 285 255 Exhibit 14: Bhopal Exhibit 15: Meerut Exhibit 16: Kanpur March 26, 2015 6
East: Region s average up by Rs5/bag QoQ; demand in WB and Orissa remained weak Exhibit 17: Kolkata 410 390 Exhibit 18: Patna 390 380 Exhibit 19: Bhubaneswar March 26, 2015 7
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