SECTOR UPDATE - Cement - Low-base effect boosts volumes in November - Sharekhan

Cumulative volume for pan-India players grew by 16.3% on low base effect: The volume growth of the top three domestic cement players, namely ACC, Ambuja Cements and UltraTech Cement (UltraTech), for November 2011 was impressive on a year-on-year (Y-o-Y) basis. This was largely on account of the low base of November 2010. Among the companies Ambuja Cements registered a robust 29.3% growth in its dispatches due to the low base effect (in November 2010 the company's dispatches had dropped by 9% year on year [YoY]) and an improvement in the cement offtake. Further, UltraTech has also posted an impressive dispatch growth of 16.3% YoY for the month. On the other hand, ACC has posted a 5.2% growth in its dispatches. Hence, cumulatively the pan-India players have registered a 16.2% volume growth. On a month-on-month (M-o-M) basis the cumulative dispatches declined by 2.7%.

Cement offtake remains sluggish, western region witnessed improvement: In terms of demand, dealers have confirmed that the cement offtake in most parts of the country remained sluggish primarily due to the slowdown in the real estate segment and slower than expected execution of government infrastructure projects. Further, the political hurdle in Andhra Pradesh also remained a key drag on the volume growth of Andhra Pradesh, which is a major state of the southern region. However, the issue of unavailability of river sand in the western region was resolved during November and hence the cement offtake in the region was relatively better. The southern and eastern regions continued to face a sluggish demand environment.

Cement price hike in most parts of the country, southern region remains stable: During the month cement prices in most parts of the country increased by Rs5-15 per bag of 50kg. The western and eastern regions witnessed the highest price hike month on month (MoM) whereas cement prices in the southern region remained largely unchanged on an M-o-M basis. The price hike was largely on account of the supply discipline mechanism followed by the manufacturers. However, dealers are of the view that the current price hike is likely to sustain (except in the eastern region) in the near term as cement offtake is expected to improve going ahead.

Outlook: remain bullish on Grasim and Orient Paper: We believe the sector could underperform in the near term as there is a possibility that the cement manufacturers may fail to adhere to supply discipline due to a likely pick-up in the cement offtake. However, we believe any correction in the sector will provide the investment opportunity for select companies. We prefer Grasim Industries (Grasim) in the large-cap space and Orient Paper and Industries (Orient Paper) in the mid-cap space.

Source : Equity Bulls

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