We expect cement majors in India to continue delivering strong returns as we factor in sustainable pricing power led by the ensuing supply discipline, moderating operating cost growth on account of lower fuel costs and improving cement demand growth as infrastructure spending is likely to increase across India.
All these imply that the profitability of companies under coverage is likely to expand during FY12-14E (estimated) and thereafter, justifying their premium valuations versus historical averages. We raise our net realization growth estimates for these firms by 2-3%, thereby increasing profit.
A larger share of variable costs in the companies’ operating costs, steep hike in variable input costs and capital costs have raised break-even price levels for cement manufacturers. As cement demand is price inelastic and industry utilization is expected to remain low until FY15E, supply discipline (versus fight for market share) remains the most appealing choice for manufacturers to stabilize their profitability.
Edited excerpts from a report by Karvy Stock Broking Ltd. We welcome your comments at firstname.lastname@example.org.