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Supply shortage & delayed monsoon drive price hikes

All India prices at Rs308/bag +2.3% mom. Supply shortage led

July 25, 2012

Price Performance
ACC (Rs1,277 HOLD) 1M 6 6

by plant shutdowns & delayed monsoons helping demand; prices in north hiked +6% mom, central + 4% & western 3% mom. Price likely to soften with pick up of monsoon in August

(%)

3M 5 7

6M 12M 9 10 28 40

Subdued demand exerting downward pressure in eastern

Absolute Rel. to Sensex

region-prices decline 3.6% mom. Electricity cuts drive AP upwards Rs20/bag hikes. Other southern regions remain flat unusual decline seen during April-May period. Price recovery positive for producers

Ambuja (Rs174 REDUCE)

(%)

Prices trend has surprised in June July period despite some

6M 12M 8 9 34 47

1M 4 4

3M 15 17

Absolute Rel. to Sensex

Cost pressure peaking out with international coal prices

Grasim (Rs2,634 HOLD)

(%)

1M 7 7

3M 4 6

6M 12M 6 7 21 32

decline. Prefer ACC & Shree Cement. Retain HOLD on Ultratech (prefer Grasim). Maintain REDUCE on Ambuja & India Cement

Absolute Rel. to Sensex

Ultratech (Rs1,616 HOLD)

(%)

1M 10 10

3M 14 17

6M 12M 31 32 62 76

Absolute Rel. to Sensex

India Cements (Rs82 HOLD)

(%)

1M (2) (2)

3M (10) (8)

6M 12M 1 2 15 25

Absolute Rel. to Sensex

Our recent channel checks suggest that plant shutdowns in Chattisgarh (4 cement plants2 plants of UltraTech and 1 each of Ambuja Cement and Lafarge shut on alleged violation of air pollution control norms by Chattisgarh Environment Conservation Board) along with routine maintenance shutdowns (for some kilns) taken by cement producers in this period has resulted in a shortage of supply of cement. This together with delayed monsoon (which usually affect construction activities) is helping demand remain above expected seasonal levels, and has led to a temporary un-seasonal demand-supply mismatch; thereby fuelling cement prices hikes in Northern, central and western region. On the other hand owing to normal rainfall received in the eastern part of the country prices remain under pressure with a 3% mom decline. Price trend in Southern region remains flattish with the exception of Andhra Pradesh where electricity cuts drive prices up by Rs2025/bag.

Industry Growth estimated at ~9-9.5%

Madras Cements (Rs157 HOLD)
(%)

1M 6 7

3M 7 9

6M 12M 35 36 86 103

Absolute Rel. to Sensex

The top 5 producers have posted a growth of 10.2% in the month of June. The industry growth normally trends at 80-90% of the top 5 producers dispatch growth trend ( exception in the month of April-12) thereby pointing towards estimates of 9-9.5% yoy dispatch growth for industry in the month of June-12.
Exhibit 1: Top 5 producers dispatch growth vs Industry

Orient Paper (Rs64 BUY)

(%)

1M 19 19

3M 14 16

6M 12M 28 30 0 9

Absolute Rel. to Sensex

Shree Cements (Rs3,000 ACCUM)

(%)

1M 3 3

3M 9 11

6M 12M 37 38 68 83

15 12 9 6 3 0

11.0

10.9

11.9

10.0

10.6

20% 10.1 15% 10% 5% 0%

Absolute Rel. to Sensex

Source: Bloomberg

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Top 5 producers dispatches ( mnt) Industry Dispatch Grow th (%)

Source: Industry, Emkay Research

% grow th yoy

Ajit Motwani ajit.motwani@emkayglobal.com +91-22-66121255 Chandan Asrani chandan.asrani@emkayglobal.com +91-22-66121241

Regional Impact of delayed monsoons on cement prices

Northern Region: Rainfall in the northern region remains deficient with departure from long period average (LPA) of almost ~50-70%. The effect of this can be seen in pockets like Chandigarh and Punjab where prices have been hiked by 10.2% and 8.8% mom.

Emkay Global Financial Services Ltd.

Sector Update

Emkay

Cement

Cement

Sector Update

Eastern Region : On the other hand prices in eastern region have declined by 3.6% mom with normal rainfall received by West Bengal , Orissa and Assam Western & Central Region: Majority pockets in these are witnessing deficient rainfall with average departure of ~20-60% from LPA. This has resulted in prices moving upwards in both these regions by average of ~3-6% mom

Exhibit 2: Monthly Price trends & rainfall status Region North Delhi Hayana Haryana Chandigarh Rajasthan HP Punjab Punjab J&K Delhi Karnal Rohtak Chandigarh Jaipur Simla Bhatinda Ludhiana Jammu Average Central UP UP UP UP MP Lucknow Meerut Faizabad Bareilly Bhopal Average East West Bengal Bihar Bihar Orissa Assam Calcutta Patna Muzaffarpur Bhubneshwar Gauwhati Average West Maharashtra Maharashtra Maharashtra Gujarat Gujarat Gujarat Gujarat Bombay Nagpur Pune Ahmedabad Rajkot Baroda Surat Average South Tamil Nadu Kerala Kerala Karnataka Chennai Trivandrum Calicut Bangalore Deficient Deficient Deficient Deficient Normal Normal Normal -20 -39 -39 -35 -4 7 -12 Normal Normal Deficient Deficient Deficient Deficient Deficient -13 -6 -28 -54 -54 -54 -54 Normal Deficient Deficient Normal Normal 4 -21 -21 -17 9 Deficient Deficient Deficient Deficient Deficient -21 -59 -21 -59 -29 Rainfall Status Deficient Scanty Scanty Scanty Deficient Deficient Scanty Scanty Deficient % departure from LPA -56 -70 -70 -70 -47 -51 -68 -68 -39 Prices in Prices in Q113 July, 2012 June, 2012 Average 300 290 290 325 305 285 310 310 340 306 310 300 290 280 310 298 345 330 325 320 310 326 305 310 330 290 275 280 295 298 310 340 340 315 305 290 300 314 270 280 280 295 295 280 300 285 320 289 290 295 280 280 290 287 360 335 330 325 340 338 305 300 325 275 265 270 285 289 310 335 335 315 275 268 285 303 276 274 277 298 290 266 284 280 318 285 275 286 277 270 277 277 361 327 312 317 340 331 295 288 320 268 255 265 274 281 303 334 334 307 282 275 286 303 % Change MoM 11.1% 3.6% 3.6% 10.2% 3.4% 1.8% 3.3% 8.8% 6.3% 5.8% 6.9% 1.7% 3.6% 0.0% 6.9% 3.8% -4.2% -1.5% -1.5% -1.5% -8.8% -3.6% 0.0% 3.3% 1.5% 5.5% 3.8% 3.7% 3.5% 3.0% 0.0% 1.5% 1.5% 0.0% 10.9% 8.2% 5.3% 3.6% % change from Q113 8.7% 5.8% 4.7% 9.1% 5.2% 7.1% 9.2% 10.7% 6.9% 7.5% 12.7% 4.9% 4.7% 3.7% 11.9% 7.6% -4.4% 0.9% 4.2% 0.9% -8.8% -1.6% 3.4% 7.6% 3.1% 8.2% 7.8% 5.7% 7.7% 6.1% 2.3% 1.8% 1.8% 2.6% 8.2% 5.5% 4.9% 3.7% Flat Flat Flat Flat Flat Flat Flat Down Down Down Down Down Down Down Down Flat Flat Down Down Down Down Down Down Flat Expected trend Down Down Down Down Down Down Down Down Down

Andhra Pradesh Hyderabad Andhra Pradesh Vishakapatnam Goa Goa Average

Source: IMD, Companies, Emkay Research LPA: Long Period Average

Emkay Research

July 25, 2012

Cement

Sector Update

Regional Price Scenario

Northern Region: Prices hiked by Rs15-35/bag, up 6 % mom led by supply shortage

Prices in northern region rise by almost Rs15-35/bag mom mainly led by supply constraints. Delayed monsoons keeps demand intact in pockets like Haryana, Chandigarh and Rajasthan while regions in Punjab face some pressure on offtake due to escalated costs for aggregates and issues with sand availability. Prices have started coming off in Punjab and dealers throughout the region believe that with pick up in monsoon prices would witness another correction of Rs10/bag in coming weeks

Central Region: Prices increase by 4 % however subdued demand exerting pressure with corrections witnessed in Meerut and Bareily post hikes in June end

Prices in the regions like Lucknow and Bhopal have been hiked by Rs15-20/bag th compared to June 20 prices. However pockets of Meerut and Bareily witness slight corrections post the June end hikes owing to slowdown in demand with prices th returning to June 20 levels Expect prices to correct by Rs10-15/bag in coming few weeks with pick up in monsoons affecting construction activities

Eastern Region: Prices have corrected by -3.6% mom owing to normal rainfall received

Prices in the region have started declining since last month with corrections of Rs1530/bag witnessed in July led by slowdown in demand momentum with the pick up in monsoon. In pockets like Guhwati the prices have crashed by almost Rs15-20/bag while floods in North Bengal have resulted in price corrections of Rs15-20/bag in Kolkatta. Cement offtake affected by monsoons. Expect some downward pressure on prices in coming few weeks

Western Region: Prices hiked by 3 % mom, however expect corrections with pick up in monsoons

Prices hiked by Rs10-15 mom across the region except Mumbai where prices remain flat compared with June levels. In Mumbai, producers effort to push hike last week were in vain owing to reduced demand. Delayed monsoons one of the key triggers for this unexpected hike which would provide cushion to the seasonal fall witnessed in monsoon, expected in few weeks from now.

Southern Region: Average price in South up 3.6 % led by hikes in Andhra. Other pockets remain flattish

Prices in Andhra hiked by Rs20-25 /bag over last one month owing to less supply in the region led by electricity cuts impacting production. However new players like JPA and JSW seem to be eroding the market space with aggressive pricing (Rs30/bag lesser than other premium brands like ACC and Ultratech. Other regions remain more or less flattish with prices expected to remain stable in the coming weeks.

Emkay Research

July 25, 2012

Cement
Exhibit 3: Quarterly Price Trend (Rs per bag) North Q4FY11 FY11 Apr-11 May-11 Jun-11 Q1FY12 Jul-11 Aug-11 Sep-11 Q2FY12 Oct-11 Nov-11 Dec-11 Q3FY12 Jan-12 Feb-12 Mar-12 Q4FY12 Apr-12 May-12 Jun-12 Q1FY13 Jul-12 270 257 286 282 272 280 255 241 246 247 265 278 279 274 274 269 276 273 289 279 286 285 302

Sector Update

Central 250 234 264 255 241 253 234 223 229 229 253 256 248 252 246 244 257 249 276 273 281 277 296

East 247 250 259 248 239 249 233 244 249 242 264 282 280 276 283 294 310 296 334 328 332 331 324

West 255 226 278 269 255 268 240 244 240 241 241 248 254 248 256 271 281 269 285 275 281 281 293

South 278 247 285 286 279 283 278 278 279 278 288 289 287 288 287 287 296 290 311 297 301 303 312

All India 260 243 274 268 257 266 248 246 249 247 262 271 270 268 269 273 284 275 299 290 296 295 305

Source: Emkay Research *Note: Prices for July include averages only till July20, 2012

Exhibit 4: Landed price of intl coal (in INR terms) declines 7% from recent peaks (in Q4FY11) International Coal Q112 Q212 Q312 Q412 Q113 Coal price USD USD-INR Coal Price INR YoY (%)
Source: Bloomberg, Emkay Research

121 44.7 5412 31%

117 45.9 5347 30%

107 50.9 5421 16%

105 50.1 5257 -4%

94 54.0 5065 -6%

Outlook
The period of April May witnessed prices declining which was an unusual trend . However June July period has been a recovery which has been mainly due to shortage in supply and a delayed monsoon which has given producers a extra window to push up prices. This recent hike will undoubtedly become a cushion for the seasonal fall in cement prices with the pick up in monsoon and is likely to positively surprise the street on the realization front . This fact was clearly visible with Ultratechs result, the largest pan India cement producer and has led to upgrades in the estimates for FY13 and FY14. The market doesnt seem to succumb to the pressure of the recent penalties levied by the Competition Commission of India and the delayed monsoons have provided producers with another window to cushion themselves from the seasonal fall which is likely to follow with the pick up in monsoons in the coming few weeks . Net net we see this as a positive trigger for cement producers with key costs seeming to have peeked out while high realizations resulting in upwards revision for companies like Ultratech. Prefer ACC & Shree Cement. Retain HOLD on Ultratech (prefer Grasim). Maintain REDUCE on Ambuja & India Cement

Emkay Research

July 25, 2012

Cement
Exhibit 5: Valuations & Recommendations PE (x) Company name ACC Ambuja Cements Grasim Industries India Cements Madras Cements Orient Paper Shree Cements Ultratech Cement
Source: Companies, Emkay Research

Sector Update

EV/EBITDA (X) FY14E 15.4 15.6 10.7 8.1 10.1 4.5 22.4 15.2 FY12 12.5 12.3 6.4 5.5 6.9 4.3 8.1 11.1 FY13E 10.1 10.5 5.1 5.4 7.3 3.5 6.8 9.5 FY14E 8.5 8.8 3.5 4.6 6.1 2.6 5.8 8.3 FY12 161.0 189.3 0.0 80.6 106.6 69.2 166.7 171.2

EV/tonne (USD) FY13E 136.1 177.2 0.0 76.6 97.4 62.5 148.7 151.9 FY14E 141.4 173.4 0.0 80.5 94.6 51.3 136.4 138.3

Reco Hold Reduce Hold Hold Hold Buy Accumulate Hold

TP (Rs) 1,220 165 2,600 101 138 80 3,000 1,530

FY12 22.8 22.0 34.6 8.5 9.4 5.7 29.3 19.3

FY13E 18.9 18.2 10.7 10.5 12.6 5.3 29.9 16.1

Exhibit 6: Key Financials Rs bn Company name ACC Ambuja Cements Grasim Industries India Cements Madras Cements Orient Paper Shree Cements Ultratech Cement FY12 94.4 85.1 230.4 42.0 32.4 24.3 46.9 181.7 Sales FY13E 107.7 97.0 258.1 45.7 34.5 28.0 53.5 210.6 FY14E 121.7 107.9 298.9 51.3 38.9 31.4 62.7 238.7 FY12 17.0 19.4 33.7 9.0 9.3 4.1 12.4 40.0 EBITDA FY13E 20.2 22.2 53.8 8.9 8.2 4.6 14.2 48.2 FY14E 24.1 25.8 63.0 10.2 9.3 5.3 16.2 53.6 FY12 10.5 12.2 7.0 3.0 4.0 2.2 3.6 23.0 PAT FY13E 12.7 14.7 22.5 2.4 3.0 2.3 3.5 27.6 FY14E 15.6 17.1 26.2 3.1 3.7 2.8 4.7 29.2 FY12 56.0 7.9 76.1 9.7 16.7 11.3 102.4 83.9 EPS (Rs/share) FY13E 67.7 9.6 245.7 7.8 12.5 12.0 100.3 100.6 FY14E 83.1 11.2 285.3 10.1 15.5 14.2 133.9 106.7

Source: Companies, Emkay Research

Emkay Research

July 25, 2012

Cement

Sector Update

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Emkay Research

July 25, 2012

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