Summary
of Contents
SECTOR UPDATE
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. | |