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Raise target multiples in cement sector on fall in capital cost

On fundamentals, we see the Indian Cement sector poised for earnings recovery as: the industry (barring East region) has minimal pending capacity addition; good monsoons offer hope of demand recovery in H2; and price movement in monsoons offer hope of offsetting likely rise in fuel costs and drive likely margin improvement.

By: | Published: September 15, 2016 6:17 AM
While stock preference ideally calls for a move to leveraged names, we note demand growth is still patchy and hence, our recommendation to stick with co’s with strong b/s and high op leverage. (Reuters) While stock preference ideally calls for a move to leveraged names, we note demand growth is still patchy and hence, our recommendation to stick with co’s with strong b/s and high op leverage. (Reuters)

On fundamentals, we see the Indian Cement sector poised for earnings recovery as: the industry (barring East region) has minimal pending capacity addition; good monsoons offer hope of demand recovery in H2; and price movement in monsoons offer hope of offsetting likely rise in fuel costs and drive likely margin improvement. While valuations seem rich across our sector coverage, we raise target multiples to factor in likely fall in cost of capital from a softer interest rate cycle.

While stock preference ideally calls for a move to leveraged names, we note demand growth is still patchy and hence, our recommendation to stick with co’s with strong b/s and high op leverage.

Our recent channel checks suggest that demand growth in the month of August remained subdued in a 2-4% range across most regions and is likely to take YTD demand to only 4.3%. However, most players agree that rainfall across most parts of the country has been normal and this has raised hopes of a pick-up in housing demand across rural parts, tier-2 and tier-3 cities in the second half of this year.

Road construction activity has remained strong, barring the normal slackness seen in the monsoon season. In this scenario, we maintain our demand growth estimate for FY17at 7% —implying an ask rate of 9% demand growth in H2.

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