Cement pricing lacking momentum: Our conversations with dealers seem to suggest a lack of pricing momentum and confusion around the general direction, with hikes and cuts being announced in a span of days and not much change in the demand situation. Demand continues to remain muted; dealers have cited issues such as lack of pre-election spend, political agitation, sand mining ban, and shortage of labour. Supply may rise in December as some companies have a December YE (year-end); most dealers are expecting improved demand-supply dynamics by early CY14.
Pricing—slight increases in the north and west: North: Prices in Delhi have wavered through November, but have been raised by 7% to R320/bag for December. Dealers are skeptical about the sustainability of this hike and mentioned there has been no spurt in demand as a result of the elections.
West: Mumbai prices have been raised by 3% to R310/bag; demand continues to remain muted.
South: Prices in Hyderabad are stable at R280/bag–production discipline is continuing; demand is weak exacerbated by the lack of government spending and political agitation. Prices in Chennai have fallen marginally (3%) to R320/bag, sand mining issues have continued to persist.
East: Demand trends in Kolkata have also been disappointing with limited revival post-monsoon, lack of spending and labour shortage. Prices have corrected by 2% to R320/bag.
Apr-Oct13 demand growth 4%: According to the ministry of commerce and industry, India’s cement production grew 4% during April-October13 vs. GDP growth at 4.6%. Cement production growth in October remained subdued at 1%. We forecast FY14 demand growth at 5%, demand-supply gap to widen (110mt in FY14e vs. 100mt last year) with utilisation at record lows (<70%).
Sell UltraTech Cement
: We expect pricing to be volatile; the fight for market share may resurface as chunky capacities are expected in H2. Ultratech continues to lose market share—H1 domestic volumes at 19mt were flat year-on-year vs. national demand growth of 4.5% during Apr-Sep13. At $162 EV/t (on capacity of 57mt), valuations appear expensive.
We set our target of R1,475 for Ultratech at 10x Sept14e EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation, and amortisation)- at a premium to peers (in line with the spread over the last year). Ultratech (under-load tap changer) is not exposed to the uncertainty associated with royalty payments as is the case with some other cement producers. At our target price, Ultratech would trade at