The cement industry’s volumes are likely to grow 8%-9% in FY13, driven by individual housing and expected infrastructure push, says a Motilal Oswal report
Motilal Oswal Financial Services hosted ACC, Ambuja Cements and Grasim/ Ultratech at the Motilal Oswal 8th Annual Global Investor Conference. Based on the conference and the inputs from the brokerage firm, the following observations have been made about the cement industry: (a) Volumes are likely to grow 8%-9% in FY13, driven by individual housing and expected infrastructure push. Seasonal price correction has been sub-normal till August due to delayed monsoon (b) Capacity addition should slow down to about 60 million tonnes (MT) over FY13-15. Increase in capex cost necessitates sustenance of higher profitability; downside risks are limited. (c) The costs of power, fuel and freight, which have been rising, are likely to stabilize at elevated levels. The focus would remain on enhancing operating efficiencies and maintaining margins.
Motilal Oswal observes that Ambuja and Grasim/Ultratech among large-caps and Shree Cement among mid-caps are the bright performers in the industry.
Other issues in the cement industry which have been pointed out by Motilal Oswal include that pre-election infrastructure spending has the potential to boost growth to over 9.5%, while expectations from organized real estate remain subdued. Delayed monsoon has resulted in lower seasonal price moderation till August 2012. The cement majors expect demand-supply equation to improve, with slowdown in capacity addition. Only about 60 MT capacity addition is planned over FY13-15 and there could be delays, given the prevailing challenges in approvals and execution. While most players have exhausted their brownfield capacity addition potential, the economic feasibility of greenfield capacity is limited at current profitability.
In this context, Motilal Oswal states clearly that high capex cost necessitates sustenance of higher profitability. The companies guided greenfield capex cost at Rs7,000-Rs7,500/tonne (excluding captive power). Downside risk to prices is limited, given elevated capex and operating expenses. EBITDA/tonne of Rs1,200-Rs1,300 is required to earn reasonable RoIC (return on invested capital) and address 12%-14% cost of capital.
On the cost of production side, Motilal Oswal says that for the cement industry as a whole, the cost pressure is stabilizing; and there is conscious effort on the part of industry players to improve efficiencies. The costs of power, fuel and freight, which have been rising, are likely to stabilize at elevated levels. To combat inflation and high capex, the focus would continue to be on maintaining margins. Achieving energy efficiency, use of alternate fuels, increasing CPP (captive power plant) load factors, technical de-bottlenecking, etc, would be the key focus areas to enhance operating efficiencies.
Finally, as a prediction for the cement industry, Motilal Oswal says, “We believe that the worst is behind for the cement industry and a gradual and consistent improvement in capacity utilization and operating performance is impending. After the recent outperformance, cement stocks are trading at historical average valuations, leaving limited room for further re-rating. We expect strong earnings growth to drive stock performance, hereon.”
Reliance Industries had projected an output of 27.6 msmcmd for FY13. However, the fields have seen the output drop to 27.65 mmscmd in August itself even as the company shut eight wells due to water and sand ingress
The Anil Ambani group company has declared 50% special dividend on completion of 25 years. This is in addition to the 75% dividend already paid