As per the data provided by the Ministry of Commerce and Industry, all‐India cement production grew by 13.4% YoY at 43.3m tonnes during Jul‐Aug 2014. The strong growth was supported by low base and unleash of pent‐up demand.

1. RETAIL RESEARCH Cement Sector Preview – Q2FY15/Q3CY14 Oct 17, 2014
After the results of the general elections, the demand for cement has started to improve on expectations of an improvement in the macro-economy and a revival of
investment in the infrastructure and housing sectors. Industry volumes grew ~16.5% in July and ~10.3% in August 2014. The strong growth was supported by low base
and unleash of pent‐up demand. Despite robust volume growth, the quarter witnessed sharp price drop (~9% QoQ) in the North, while production discipline led to surge
of ~16% QoQ in the South. As a result, all-India average prices increased by ~2% QoQ (as against a drop of ~3% QoQ in Q2 last year). The quarter will also see full impact
of the 6.5% hike in railway freight in mid-June 2014, leading to 1-2% QoQ rise in variable cost. Post monsoon and festival season, cement prices may again firm up in
select regions on the back of an improvement in demand and a slowdown in capacity addition.
Cement demand remain strong in 2QFY15
As per the data provided by the Ministry of Commerce and Industry, all‐India cement production grew by 13.4% YoY at 43.3m tonnes during Jul‐Aug 2014. The strong
growth was supported by low base and unleash of pent‐up demand. We expect growth of 2‐3% YoY in Sep, given the high base and elevated inventory at the customer
end. The demand continues to remain robust after it improved to ~9% during Q1FY15. However volume growth for south based cement companies is expected to
remain muted. We believe that the demand growth has been strong in the north and central regions in last six months.
During Q2FY15 quarter, South region turned Northway
All‐India cement prices rose by ~2% QoQ (6% YoY) to Rs307/bag. Southern/Maharashtra regions posted the highest increase of 9/15% QoQ, driven solely by tight
discipline. The best performer of last quarter, Northern region, witnessed steep cut in prices of ~8% QoQ, given the high base. Prices in the Central region fell 2% QoQ.
During Q2FY15, Northern regions have witnessed price correction due to weak base, followed by sharp rally in the previous quarter while in South, prices have remained
strong and witnessed further price increase of Rs.25-30/bag during the quarter as the bifurcation of AP region would benefit south focused cement company. However,
the prices at pan India level have remained higher on YoY basis due to strong rebound in demand. Hence players focused on the South market will benefit significantly
from sharp pricing recovery, North and East based players will see mildly negative impact on profitability due to weak pricing.
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2. EBITDA/t is likely to be strong YoY for almost all companies, especially South focused one.
Imported coal prices (in INR term) have been on a decline over the last 9-10 months and are at multi-year low levels. This has eased off the operating cost pressure for
the cement companies which use imported thermal coal from Indonesia, South Africa and pet coke from the US gulf region. Hence, the cement industry‘s profitability
should continue to benefit from lower fuel cost over the next few quarters. However, due to increase in railway freight rates and further increase in road freight charges,
freight cost/t is expected to increase YoY. Aggregate EBIDTA/t is expected to increase ~4% YoY (but, decline of 5% QoQ). South based companies are expected to see
~70% YoY improvement in EBIDTA/t led by sharp increase in realization in the South region during the quarter. EBIDTA/t ex-South based players expected to increase
~35% YoY (but decline by ~17% on sequential basis as the prices fell in North, Central and West regions during Q2FY15).
Outlook
In a seasonally weak quarter (when construction activities slow down due to the onset of the monsoon) we expect the revenues of cement companies to increase largely
supported by an increase in volume and prices (a steep price increase in the southern markets and a moderate increase in the eastern markets).
We expect, demand revival after the monsoon and festival season though prices are likely to remain stable at the current level barring in some places in the north and
the west where prices are likely to increase mildly in the near term. As highlighted earlier, the demand outlook is improving mainly led by thrust of government on big
ticket infrastructure projects, revival in road sector, setting up of smart cities as well as focus on low cost housing. With slowing pace of capacity additions, capacity
utilizations are expected to improve slightly going forward. Although Q2 is seasonally weak for cement companies, they are likely to report strong YoY earnings growth
in Q2FY15 supported by three factors: (a) better demand in certain pockets (vs low base of Q2FY14); (b) sharp price hikes in June 2014 driven by production/pricing
discipline, and (c) favourable fuel prices.
The all-India average prices too have been supportive (with hikes in the South offsetting declines in the North), rising ~2% QoQ as against a drop of ~3% QoQ in Q2FY14.
Industry volume data has been encouraging with production growth of 16.5% and 10.3% for July and August 2014, respectively. We estimate industry to have grown by
~10% YoY in Q2FY15 (~10% YoY in H1FY15). We expect variable cost to rise marginally by ~1-2% QoQ factoring in impact of 6.5% rail freight hike in mid-June 2014.
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3. Cost pressures likely to stay high during the quarter due to higher freight, power and fuel as well as other expenditure. Coal prices are also likely to move up going
forward post cancellation of coal blocks which is turn is likely to increase power and fuel cost per tonne. However, with improvement in the cement realizations during
the quarter, we expect EBITDA per tonne to improve sequentially. The OPMs are likely to remain stable YoY supported by an increase in the realizations.
Going ahead, the key issues to watch out are revival of the demand across the country, improvement and sustainability of the cement prices post-festival season.
ACC
Particulars Q2CY14 * Q3CY13 * Q3CY14E
Net Sales (Rs.Cr.) 3009.0 2508.7 Volumes in Q3CY14E could improve y-o-y by 4-6% driven by slight demand recovery and
low base of last year. Average realisations are expected to improve sequentially driven
by price hikes in the quarter. Revenue could grow y-o-y on the back of rise in realization
and volume growth. EBITDA/tonne could witness growth on account of higher
realisation, higher volume and decline in fuel cost. However, y-o-y it could witness
some decline due to higher freight costs. Bottomline growth could be better than
EBIDTA growth led by lower depreciation and interest charges.
Key issues to watch for: Volume growth recovery and outlook; Cement pricing outlook
and sustainability; Progress in ongoing capex for Jamul expansion of 5mt; Update of
synergies and other guided cost saving measures.
EBIDTA (Rs.Cr.) 171.8 286.6
Interest (Rs.Cr.) 11.1 11.0
Depreciation (Rs.Cr.) 140.1 147.0
PAT (Rs.Cr.) 243.2 118.9
EPS (Rs.) 12.9 6.3
(Source: Company, HDFC sec Research)
Ambuja Cement (ACL)
Particulars Q2CY14 Q3CY13 Q3CY14E
Net Sales (Rs.Cr.) 2706.4 2004.9 Volumes could witness growth of 1-2% y-o-y given demand pick up in North India and
supply constraints of competition. Absence of exposure in South India implies Ambuja
does not enjoy the sequential improvement in realizations experienced by other pan-
India players. Further cost/tonne is expected to rise on account of higher freight cost
and RM cost. On a low base, we expect EBITDA/t to grow YoY (though down QoQ).
Bottomline is likely to grow YoY.
Sequentially, we expect decline in EBITDA, largely driven by lower volumes, fall in
realisations and increase in costs. With sequentially lower prices in the North, Central
and West regions, realization is expected to decline QoQ.
Key issues to watch for: Volume growth recovery and outlook; Cement pricing outlook;
Progress in ongoing mining land acquisition and capex in Nagaur (Rajasthan) plant of
4.5mt
EBIDTA (Rs.Cr.) 587.8 267.9
Interest (Rs.Cr.) 20.3 17.8
Depreciation (Rs.Cr.) 124.2 124.6
PAT (Rs.Cr.) 408.7 166.0
EPS (Rs.) 2.6 1.1
(Source: Company, HDFC sec Research)
Grasim Industries (GIL)
Particulars Q1FY15 * Q2FY14 * Q2FY15E
Net Sales (Rs.Cr.) 7976.3 6800.8 VSF business has been under pressure however commissioning of new capacity at
Vilayat to drive VSF volume growth with prices showing little strength. EBIDTA (Rs.Cr.) 1218.0 1034.2 VSF realizations
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4. Interest (Rs.Cr.) 126.5 119.3 are expected to remain flat y-o-y and q-o-q, expect costs to see a marginal respite.
Margins YoY could remain under pressure with VSF EBIDTA/kg declining.
Key issues to watch for: Outlook on VSF business; strategy to utilise upcoming
capacities; Cement business outlook on demand, pricing and status of capacity addition.
Depreciation (Rs.Cr.) 357.8 357.7
PAT (Rs.Cr.) 487.1 450.3
EPS (Rs.) 53.0 49.0
(Source: Company, HDFC sec Research)
Ultratech Cement (UTCL)
Particulars Q1FY15 * Q2FY14 Q2FY15E
Net Sales (Rs.Cr.) 5988.6 4502.1 Grey cement volumes and realization expected to rise YoY and QoQ. Blended volume
also expected to rise with better demand in Northern and western regions and
commissioning of new capacity in Gujarat. Strong volume growth and higher realization
will drive strong YoY growth in profits. Sequentially, net realisation is expected to
remain flat, as sharp price in increase in cement prices in the key South India market
would offset the weakness in North India. With steep volume growth, operating cost/t
is expected to decline as Ultratech reaps the benefits of operating leverage. Owing to
higher interest and depreciation cost associated with acquisition of JP’s Gujarat plants,
growth in PAT would be restricted.
Key issues to watch for: Volume growth recovery and outlook; Cement pricing outlook
and sustainability; Progress and timeline over JPA deal; Update on financial
performance of Star Cement, UAE.
EBIDTA (Rs.Cr.) 1080.5 679.5
Interest (Rs.Cr.) 109.8 88.8
Depreciation (Rs.Cr.) 281.7 257.3
PAT (Rs.Cr.) 626.9 264.1
EPS (Rs.) 22.9 9.6
(Source: Company, HDFC sec Research, *= consolidated)
Analyst: Sheetal Poonawala Email ID: sheetal.poonawala@hdfcsec.com
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
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