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We expect accretive price increases for the cement sector in FY14 as demand growth improves to 7% compared with 5% in FY13. The recovery should be driven by strong growth in rural housing and pick-up in investment on roads and railways.

Rural housing

Demand from rural housing is driven by government-supported schemes (15% of demand) and rising rural income (85%). We expect rural housing demand to grow at 11%. Strong rural wage growth of 18-20% drives larger and more pucca houses; the penetration of pucca houses in rural India is low at 52% (versus 83% for urban India). The FY13 demand growth was affected because the government spent only 80% of its budget on the rural housing scheme, but we expect a rebound in FY14 with the budget set 70% higher.

Roads and railways

Our bottom-up analysis suggests that demand growth from irrigation and power remains muted but roads and railways are still seeing double-digit growth. If initiatives taken by the National Highways Authority of India (NHAI) to revive the road sector bear fruit, it should further add to cement demand growth.

Railways investment grew by 16% in FY13 and should grow 20% in FY14 with project awards expected for a dedicated freight corridor.

Top picks

Overall, we expect 7% cement demand growth in FY14 with housing growing at 8% and infrastructure at 5%. As the demand growth required to break-even new capacity is 6%, we expect margin expansion in FY14. Our preferred picks are Ambuja Cements Ltd and ACC Ltd with strong balance sheets (cash at 15% market cap, 18% return on equity and a dividend of 2%).

Edited excerpts from a report by Credit Suisse.

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