Cement Update – December 2006
Average cement prices in the country have gone up by Rs2 in the beginning of December 2006 as the situation improved in Southern States post monsoon. Cement prices in other regions are stable and ruling at November 2006 levels. Cement prices in Southern States were depressed in the first half of November due to monsoon. Construction activities picked up smartly due to the real estate boom in Southern States.
We expect cement prices to rise in Southern States in January again as they are slightly low compared to pre monsoon levels and the demand is strong. With the onset of peak construction period we expect cement prices to go up in the coming months in other regions also. The dispatch growth is better by 100 basis points compared to the April-November period in FY06.
Outlook
The economy is growing strongly and the October 2006 IIP slowdown is considered to be just a blip due to festivals. Demand for cement is picking up and with the onset of peak construction period, this is expected to grow at a faster pace in future. We feel the initial estimates of 10% growth for FY07 may get surpassed as construction activities pick up. The demand from Housing, Retail and SEZ is expected to keep the growth at higher levels.
The supply growth is not matching with the demand growth at present. With the supply growth lagging behind we see possibilities of further upside in price in the coming months, but we the yoy growth may come down going forward.
The margin for cement companies operating in Tamil Nadu is expected to rise slightly as the state is implementing VAT from January 2007. The sales tax incidence will come down from 14% to 12.5% post VAT.
Our top pick continues to be Kesoram Industries (KIL), which is expected to start its additional capacity in December 2006. We expect tyre margins for the company to improve as the average rubber prices are trading at lower levels compared to last quarter. KIL is ramping up its tyre capacity also. There is possibility for upward revision in our estimates for KIL if rubber and tyre prices continue at the present levels. The tyre industry is expected to do well for the next few years and we find the valuations of KIL not justifying the growth opportunities in the tyre industry. We retain our HOLD rating for ACC and BUY rating on Shree Cement and downgrade Ultratech Cement to HOLD from BUY as we feel the share price of the company reflect possible upside in cement prices and gains from fuel price reductions.