Our cement universe comprising ACC Ltd, Ambuja Cements Ltd, UltraTech Cement Ltd, India Cements Ltd, Madras Cement Ltd and JK Lakshmi Cement Ltd posted sales growth of 24.1% in the second quarter of FY12, driven by improvement in year-on-year (y-o-y) realization because of adoption of a strong production discipline.
Four of the six firms under coverage posted growth of up to 19% in dispatches, while south India-based firms, India Cements Ltd and Madras Cement Ltd, witnessed a decline. While all the firms under coverage posted realization growth, the southern firms showed meaningful improvement in operating margins.
Overall, the rate of capacity addition is set to moderate with only 31 million tonnes per annum of capacity expected to be added over FY12-13. Cement demand is expected to remain muted at 5% in FY12.
For FY13, we expect the central region to report the highest capacity utilization of 87%, followed by the northern, eastern and western regions with capacity utilization of 83%, 80% and 79%, respectively. However, we expect the southern region to continue to be a laggard.
The cement sector’s valuations in terms of enterprise value per sales and enterprise value per tonne are trading ahead of the cycle compared with utilization levels. But, despite low capacity utilization, cement firms have managed to maintain relatively healthy pricing. However, this is a thin investment thesis to rely on as there exists persistent risk of a breakdown in production discipline. Hence, we maintain neutral view on the sector.
Edited excerpts from a report by Angel Broking Ltd.
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