Cement demand has been muted in first half of CY15, resulting in price weakness. But we now see initial signs of demand recovery. After beingweak in March and April, demand in thelast few weeks has grown, driven by some demand recovery. We expect it to further improve in H2FY16. We estimate 7% and 9% demand growth in FY16 and FY17, respectively.
We seecapacity addition slowing to 6% in FY16,versus 10% CAGR over FY10-14.The pipelineremains thin thereafter, with FY17 addition at 2%,and very low visibility beyond that. Therefore, we believe medium-term earnings growth will berobust.
While current stock multiples are at a premium to history, given the strong earnings growth outlook and high visibility for medium-term growth, the multiples will sustain.
We revise down ourFY16e earnings by 10-12% and FY17e earnings by 8-13% on the back of lower volumes and cement price assumptions.We still factor in 22-41% FY15-17e earnings CAGR, driven by improved volume growth and margin expansion. Our price targets move down by 7-13%, primarily driven by the earnings cuts, but still imply 9-38% upside. Ultratech Cement remains our top pick, while Ambuja is a relative underweight given lack of capacity addition versus peers.