Cement Sector Monthly Update ; May 09 dispatches grow @ 10.8%, price crosses Rs250

Key Highlights

n        Cement industry continued its stellar performance with May09 cement dispatches growth at 10.8% yoy to 16.45mnt.

n        Grasim and Ultratech witnessed high dispatch growth with Grasim registering dispatch growth of 21.6% yoy while the same for Ultratech stood at 25.5%. Ambuja dispatch growth for May stood at 8.3% yoy while ACC was the laggard in the pack registering muted growth of 1.11% yoy. Shree Cement and Jaypee posted dispatch growth of 32.2% and 25.7% driven by capacity additions.

n        Northern region registered high dispatch growth of 26.3% yoy driven by pick up in construction activity on account of common wealth games and some pickup seen in urban housing. Central, Western and Eastern regions registered dispatch growth of 11.0%, 8.3% and 7.2% respectively while South witnessed lower dispatch growth of 4.1%.

n        All India Cement prices crossed Rs250/bag mark in May with average price ruling at Rs251/bag, a yoy increase of 5.64%. Even on a m-o-m basis, the prices increased by Rs4/bag.

n        Central region continued to register the highest growth in prices with May 09 growth pegged at 12.84% yoy. East prices increased by a huge Rs13 in May to Rs258/bag (+6.94% yoy) while North witnessed price increase of 4.54% yoy to Rs250/bag. Prices in South increased by 3.70% yoy to Rs259/bag. However on a m-o-m basis, the prices have come down by Rs3/bag. In Western region, even though prices witnessed a muted growth of 0.79%yoy to Rs239/bag, the same were up by Rs4/bag on an m-o-m basis.

n        In our estimates we have built in cement dispatches growth of 7% for FY2010. The growth is likely to be 11.5% for Q1FY2010. In this case implied 9MY2010 growth would be barely 5.5% yoy. We believe there does exist room for positive surprise on cement demand estimates for FY2010.

n        Cement prices have averaged close to Rs243 in H1CY2009. This implies that to achieve our estimate of Rs230 price for CY2009, H2CY2009 prices should average Rs217, essentially implying cement prices to decline to Rs210 by Dec 2009. We believe that given the strong momentum in demand growth, and very high possibility of robust infra spend in CY2009, this implied decline of Rs40/bag in H2CY2009 is unlikely to happen.

n        Hence there exists significant room for us to upgrade our current cement price assumption (Rs230/bag) by Rs5.-7/bag, leading to earnings upgrade of 5-10% for cement companies under our coverage.  Overall we remain positive on earnings traction in the sector and believe that consensus earnings upgrade will continue to happen for the sector over next couple of quarter.