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Executive summary
Export ban raises uncertainty in pre-election environment
Rising inflation, especially as we head into a pre-election year, has forced the Indian
government to ban cement exports. In addition, one of the inferences from the finance
minister’s speech is that the Indian government may take additional steps to nationalize the
industry, akin to Venezuela’s cement sector. However, unlike Venezuela, the fears of
nationalization may be unfounded as (1) according to the data provided by the government of
India, the cement industry has not contributed to inflation as prices of cement have virtually
remained constant, (2) inflationary pressures from commodities and fuel could decline as
China and US slow down (DB forecast), and (3) the much talked about infrastructure spend in
India may turn out a disaster if the cement shortage continues as cement imports are a
logistical nightmare due to limitations of Indian ports. Amidst the uncertainty surrounding the
issue, one possible solution could be that the government lowers excise duties, provided it
gets an undertaking from cement manufacturers that they pass on this benefit to consumers.
India likely to remain in deficit over the next 4-6 quarters
A survey of cement companies suggests that plans to set up export-oriented plants have
been deferred. Domestic demand continues to grow at 10% from projects which have
already commenced. Hence even if the export ban were to continue, India would remain in
deficit for the next 4-6 quarters. Furthermore, the twin events of an Indian export ban and the
closure of 10mnt of cement plants in the Middle East for conversion from gas-based to coalbased
units could drive up international prices and make imports unviable. The attempt to
control cement prices may fail as retailers could use the opportunity to raise cement prices.
We now factor in that most of the cost may not be passed on
We cut our new estimates to factor in stable cement prices and higher energy costs.
Accordingly, we cut average realizations of cement companies by ~3-5% in FY09e and 4-5%
in FY10e. The other important change is in our assumption of higher energy costs impacting
the power and fuel cost/t. Based on our new assumptions, we have pruned our estimates for
almost all companies under coverage by ~15-40% for the next two years.
Our EPS estimates look reasonable
Despite our downward revisions in earnings; we are marginally above consensus for ACC
and Grasim. For Ultratech we are below the street as we expect lower realizations in Gujarat
due to a drop in prices. For Shree Cement, the comparison may not be appropriate as the
predictability of depreciation charge is quite low. Shree Cement charges depreciation at 30-
60% p.a.
Pockets of opportunity in ACC and Grasim
We believe ACC and Grasim can deliver 12-14% upside in the next one year. Our key reasons
for holding this view in the uncertain period during the run-up to elections are:
Stocks have underperformed market
The constant pressure by the Indian government to rein in cement prices took its toll on the
performance of cement stocks, which have underperformed the broad market over six
months and one year by 11% to 25%. At the current market price free cash flow yields at 7-
16% give good downside protection for ACC and Shree Cement. Though Grasim has a
negative free cash flow yield of -1.4% (FY09e) we estimate it to turn positive to ~9% (FY10e).
Table of Contents
Executive summary ........................................................................... 3
Export ban raises uncertainty in pre-election environment .......................................................3
India likely to remain in deficit over the next 4-6 quarters.........................................................3
We now factor in that most of the cost may not be passed on................................................3
Our EPS estimates look reasonable..........................................................................................3
Pockets of opportunity in ACC and Grasim...............................................................................3
Risks ........................................................................................................................................4
Export ban is not the solution .......................................................... 5
Rising inflation is a major concern esp. in a pre-election year...................................................5
But cement has contributed very little to the inflation ..............................................................5
Export ban could backfire..........................................................................................................6
Long-term solution: provide incentives for capacity build up....................................................6
Cement to remain in deficit .............................................................. 8
Strong demand growth likely over the next two years .............................................................8
Long-term demand growth likely to range between 9-11% p.a................................................9
However, not much capacity on the way..................................................................................9
Quarterly effective capacity – “production” versus demand..................................................10
Blending ratio looks to have peaked .......................................................................................11
Our estimates are reasonable......................................................... 12
Our assumptions are for stable prices in FY09e .....................................................................12
Cost rise remains an issue ......................................................................................................13
Estimates pruned to factor higher costs and stable prices .....................................................13
Except for Ultratech, our estimates are broadly in line ...........................................................14
Valuation factors in negatives........................................................ 15
Our thematic approach shows ACC and Shree emerge as winners .......................................15
All cement stocks have underperformed markets ..................................................................15
Indian cement companies trading at a discount to regional peers..........................................16
Our target price on peak cycle multiples offers modest upside .............................................16
High free cash flow yield may act as downside protection.....................................................17
Upside triggers from promoters enhancing stake in companies ............................................17
M&A has led to sector re-rating in the past ............................................................................18
We prefer ACC and Grasim among large caps; Shree Cement among midcaps ....................20
Downgrading Ultratech (to Sell) and Ambuja Cement (to Hold) ..............................................20
Risks ......................................................................................................................................20
ACC ................................................................................................... 21
Ambuja Cements Ltd....................................................................... 28
Grasim .............................................................................................. 35
Shree Cement .................................................................................. 41
UltraTech Cement............................................................................ 47
Appendix A: New capacity ............................................................. 53
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