Cement
Cement prices to remain firm
Key points
- Even as the consumption of cement grew at 9.25% in the first six months of the year, capacity addition remained insignificant during the period. As a result, the utilisation of the existing cement capacities remained firm at 95% and cement prices rose by 25% year on year (yoy) to Rs205-210 per bag in H1FY2007.
- With all the three demand drivers, ie housing, industry and infrastructure sectors, showing strong signs of growth, the cement consumption is expected to grow at a compounded annual growth rate (CAGR) of 10-10.5% for the next three years.
- As there are very few cement equipment suppliers around the world and there is an incessant rush for setting up cement plants, the lead-time for the supply of new plant equipment has gone up to 20-24 months from 12-14 months a year ago. Hence the cement capacity additions of 75 million tonne planned for the next 24-30 months are unlikely to meet their respective commissioning schedules.
- We believe a capacity of 60-65 million metric tonne (mMT) can be realistically added over FY2006-09. This implies a compounded annual growth of 12.5-13% in capacity addition over FY2006-09.
- Given that the demand for cement is expected to grow at a CAGR of 10-10.5% and capacity addition at a CAGR of 12.5-13% over FY2006-09, we believe the capacity utilisation will remain firm and cement prices will remain benign in FY2009 as well.
- We have upgraded our cement price projections for FY2007 and FY2008. We now expect cement prices to rise by 22.8% in FY2007 and by another 5% in FY2008. Consequently, we have upgraded our earnings estimates for the cement stocks in our cement universe. ACC and Shree Cement lead the chart of earnings upgrade with 24.6% and 22.4% for FY2008. We have also upgraded our price target for ACC, Shree Cement, Grasim Industries and UltraTech Cement.
- With the recent merger and acquisition (M&A) deals in the sector taking place at high valuations of USD110-125 per tonne, we believe a new valuation benchmark has been set for the cement companies. This should provide a fresh trigger to the cement companies that have under-performed the Sensex in the last three months.
- With the cement capacity addition projects feared to miss their respective commissioning schedules and cement consumption expected to see a strong growth in the next few years, the scenario in FY2009 looks reasonable enough for cement prices to rule firm. We maintain our positive view on the sector and rate Grasim Industries, UltraTech Cement and India Cements as our top large-cap picks in the sector. Among the mid-caps we like Shree Cement and Madras Cement. We also like Orient Paper and JK Cement on account of their compelling valuations, which are much less than the sector average.
VIEWPOINT
United Phosphorus
UPL makes its sixth acquisition
United Phosphorus Ltd (UPL) is clearly on an acquisition spree. It recently snapped up Dow AgroSciences LLC's global propanil herbicide business, marketed primarily as Stam™ herbicide. It is the sixth acquisition carried out by the company in this calendar year so far. Dow AgroSciences is a wholly owned subsidiary of The Dow Chemical Company with global sales of US$3.4 billion.