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(Delayed) Spark Capital - Cement: Note on East India Cement Industry - Oversupply ahead; Premium pricing to be tested over FY15-16E onwards




Spark Capital Advisors(India) Private Limited


08 Apr 2013





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Oversupply ahead; Premium pricing to be tested over FY15-16E onwards We analyze the East Indian cement industry in detail through this note. While we remain positive on the region’s demand growth outlook over the next two to three years, the outbreak of new capacities in the region will add pressure on utilisations. Hence the premium pricing which the region is currently enjoying might wade off from FY15E onwards as East would become self sufficient market for its cement consumption. However, one silver lining is that most of the additions are from the pure play and focused companies having better balance sheet due to which some rational behavior on pricing can be expected. East India contributes to ~18% of India’s demand and ~14% of capacity. We present below our key takeaways on Eastern region. Demand – Expect high single digit growth: East India’s cement demand growth has been robust with a 12% CAGR over FY09-FY12 vs. All India’s 7% growth. This has been led by low base and a change in political and investment scenario. While it’s difficult to do a bottom up analysis of cement demand due to paucity of data, we have done a detailed study of various state budgets and their five year plans to analyze demand drivers. Some of the key demand drivers in the region over the next two to three years in our view would be (1) East India has 25% of India’s or 4.59mn housing shortage in urban areas; (2) Elections in key states of Chhattisgarh (Nov-13) and Odhisa (April-14); (3) Eastern States plan outlay in the 12th five year plan has increased 2.9x; (4) Dedicated freight corridor (5) Lower per capita consumption of cement at 115kgs v/s All India (ex-East) at 213kgs. Supply – Large additions to impact utilisations: East region is expected to see massive capacity additions over the next three years. We expect ~22.8mt of capacities to be added in the region, which is ~49% of the existing capacity. Of these additions, 2.85mt are grinding capacities setup by Century Textiles (1.5mt) and OCL (1.35mt), which are just the inter-state shift of material within the region. As a result, we expect utilisations to drop from 81% to 78% in FY15-16E . Pricing – Expect premium pricing to wade beyond FY16E: Cement prices in the East have been strong over the last one year. Current prices in the region are at a premium ~Rs. 70/bag vs. All India average cement prices. This is largely due to logistics constraints and relatively better demand growth compared to other region. However, given the large influx of capacities in the region, East markets would become self sufficient for its consumption. Hence we believe the current large premium which the region is enjoying might wade off once supply starts from new capacities. OCL India is the only pure play on East: Within our coverage names ACC (20% of dispatches), ACEM (20%), UTCEM (18%), and BCORP (25%) have sizeable presence in the East markets. OCL India is the only pure play on East markets. OCL is a market leader in the Odhisa market with a dominant market share of ~25%. At CMP, we believe the stock looks attractive at 2.4x FY13P EBITDA, EV/t of $38 and P/B of 0.8x with ~21% RoE. Key catalyst is grant of extension of permanent limestone mining lease which will aid volume growth. Top picks: With feeble demand outlook over the medium term, we selectively remain positive on stocks. We prefer ACC (Click here to read our report on ACC and ACEM) and SRCM among large caps. MC remains our preferred mid cap, howe...

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